A financial institution can hedge its interest rate risk by
A)matching the duration of its assets weighted by the book value of its assets to the duration of its liabilities weighted by the book value of its liabilities.
B)setting the duration of its assets equal to half that of the duration of its liabilities.
C)matching the duration of its assets weighted by the market value of its assets with the duration of its liabilities weighted by the market value of its liabilities.
D)setting the duration of its assets weighted by the market value of its assets to one-half that of the duration of the liabilities weighted by the market value of the liabilities.

Question

Quizplus · Accepted Answer

Matching the duration of its assets and liabilities, both weighted by their market values, is a common strategy to hedge interest rate risk. This approach ensures that the value of assets and liabilities will respond similarly to changes in interest rates, thereby mitigating the risk.

A Financial Institution Can Hedge Its Interest Rate Risk by