Immunising the balance sheet to protect equity holders from the effects of interest rate risk occurs when:
A)the maturity gap is zero
B)the repricing gap is zero
C)the duration gap 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

Immunising the balance sheet to protect equity holders from the effects of interest rate risk occurs when 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. This is known as duration matching or gap management. Choice A, B, and C are all methods of managing interest rate risk but do not necessarily result in immunising the balance sheet.

Immunising the Balance Sheet to Protect Equity Holders from the Effects