A financial institution has equity equal to one-tenth of its assets.If its asset duration is currently equal to its liability duration,then to immunize,the firm needs to:

Question

Quizplus · Accepted Answer

Since the equity is only one-tenth of assets, the firm is highly leveraged and hence should try to reduce its risk. As both assets and liabilities have the same duration, the firm can reduce its risk by decreasing the duration of its assets. By doing so, it will reduce the sensitivity of the value of its assets to changes in interest rates, thereby achieving immunization. Hence, choice A is the best course of action.

A Financial Institution Has Equity Equal to One-Tenth of Its