Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero?
A)Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
B)No, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
C)Yes, because the maturity model does not consider the timing of cash flows.
D)No, because the timing of cash flows is relevant to immunization against interest rate risk exposure.
E)No, because a representative bank will always have a positive maturity gap.

Question

Quizplus · Accepted Answer

Immunization against interest rate risk exposure can be achieved even if the maturity gap is not zero by constructing a portfolio of assets with durations equal to the liabilities. The maturity model assumes that all cash flows occur at the end of each period, which may not be realistic. By considering the timing of cash flows, an FI can construct an immunized portfolio that hedges against interest rate risk exposure, even with a non-zero maturity gap.

Can an FI Immunize Itself Against Interest Rate Risk Exposure