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.

Question

Quizplus · Accepted Answer

Immunizing the balance sheet means protecting the equity holders from the effects of interest rate risk. This occurs when the effect of a change in the level of interest rates on the value of assets of the financial institution (FI) is exactly offset by the effect of the same change in interest rates on the liabilities of the FI. This is achieved when the duration gap of the balance sheet is zero. The choice that best reflects this situation is D, where the modified duration gap of the balance sheet is zero. A, B, and C do not necessarily guarantee that the effect of changes in interest rates on assets and liabilities offset each other.

Immunizing the Balance Sheet to Protect Equity Holders from the Effects