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.

Question

Quizplus · Accepted Answer

Maturity gap is not the only measure for immunization against interest rate risk exposure. Other approaches such as duration matching or cash flow matching can be used, which do not rely on the maturity gap. As long as the cash flows of assets and liabilities are matched, the FI can immunize itself against interest rate risk, even though the maturity gap may not be zero. The timing of cash flows is indeed relevant to immunization, but maturity gap is not the only factor to consider.

Can an FI Immunize Itself Against Interest Rate Risk Exposure