Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6 percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds.These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity. If Allright wanted to hedge the balance sheet position, what is the interest rate risk exposure and what hedge would be appropriate?

Question

Quizplus · Accepted Answer

The balance sheet position is exposed to interest rate increases because the assets have higher interest rates and longer maturities compared to the liabilities. A short hedge would be appropriate to protect against the value of these assets decreasing if interest rates rise.

Allright Insurance Has Total Assets of $140 Million Consisting of $50