A financial institution can hedge its interest rate risk by:
A)matching the duration of its assets to the duration of its liabilities.
B)setting the duration of its assets equal to half that of the duration of its liabilities.
C)matching the duration of its assets,weighted by the market value of its assets with the duration of its liabilities,weighted by the market value of its liabilities.
D)setting the duration of its assets,weighted by the market value of its assets to one half that of the duration of the liabilities,weighted by the market value of the liabilities.
E)setting the duration of its assets equal to 1.0.

Question

Quizplus · Accepted Answer

Matching the duration of assets with liabilities is a common method for hedging interest rate risk. However, simply matching the duration does not take into account the size of the positions. By weighting the duration of assets and liabilities by their respective market values, a financial institution can ensure that it is adequately hedged against changes in interest rates. Option C states this approach explicitly.

A Financial Institution Can Hedge Its Interest Rate Risk By