Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when
A)the maturity gap is zero, so that all assets have a matching-maturity liability.
B)the repricing gap is zero, so that all assets have a matching liability that reprices at the same time.
C)the modified duration gap of the balance sheet is zero.
D)the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI.
E)When the modified duration is equal to the dollar duration.

Question

Quizplus · Accepted Answer

Immunizing the balance sheet means ensuring that the value of assets does not change due to interest rate fluctuations. This can be achieved by exactly offsetting the effects of interest rate changes on assets and liabilities. Option D refers to this exact offsetting, making it the correct answer. A, B, and C are also strategies for managing interest rate risk, but they do not necessarily guarantee full protection against interest rate fluctuations. Option E is incorrect because modified duration and dollar duration are not the same thing.

Immunizing the Balance Sheet to Protect Equity Holders from the Effects