If a financial institution has equated the dollar effects of interest rate risk on its assets with the dollar effects on its liabilities,it has engaged in:
A) a long hedge.
B) a short hedge.
C) a protected swap.
D) immunizing interest rate risk.
E) None of these.

Question

Quizplus · Accepted Answer

Immunizing interest rate risk means reducing or eliminating the potential impact of changes in interest rates on the financial institution's earnings and value. When a financial institution equates the dollar effects of interest rate risk on its assets with the dollar effects on its liabilities, it is engaging in a form of immunization known as duration matching. This ensures that changes in interest rates affect both assets and liabilities equally, reducing the institution's exposure to interest rate risk. This is not a long hedge, short hedge, or protected swap.

If a Financial Institution Has Equated the Dollar Effects of Interest