7-69 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

Not exactly matching the maturities of assets and liabilities allows for some flexibility in managing interest rate risk. By having a mix of asset and liability maturities, the FI can adjust its portfolio as interest rates change to minimize its exposure. This approach allows for efficient hedging without relying on derivative securities or making significant changes to the size of equity or borrowed funds. Increasing the duration of assets and equity, issuing more equity and investing in higher-yielding assets are not necessarily efficient ways to hedge interest rate risk and may involve additional costs or risks.

7-69 When the Assets and Liabilities of an FI Are