A ﬁnancial institution can hedge its interest rate risk by:
A)matching the duration of its assets to the duration of its liabilities.
B)setting the duration of its assets equal to half that of the duration of its liabilities.
C)match 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.
E)None of the above.

Question

Quizplus · Accepted Answer

Matching the duration of assets to liabilities is a common way to hedge interest rate risk, but simply matching the durations without considering market values can lead to imperfect hedges. Choice C suggests weighting both assets and liabilities by their respective market values, which ensures that the hedge accurately reflects the institution's overall risk exposure. Choices A, B, and D all involve setting durations based on rough approximations or without considering market values, making them less effective hedging strategies.

A ﬁNancial Institution Can Hedge Its Interest Rate Risk By