When the assets and liabilities of an FI are not equal in size,efficient hedging of interest rate risk can be achieved by

Question

Quizplus · Accepted Answer

If the assets and liabilities of an FI are not equal in size, hedging interest rate risk can be achieved through not exactly matching the maturities of assets and liabilities. This strategy is referred to as maturity and repricing mismatching. It involves having a combination of fixed-rate and floating-rate assets and liabilities with differing maturities. By doing this, an FI can achieve a better balance between its assets and liabilities without having to rely too heavily on derivatives to manage interest rate risk. Options A and B are not effective strategies for hedging interest rate risk, while option D involves taking on more risk, which may not be appropriate for an FI.

When the Assets and Liabilities of an FI Are Not