To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should:

Question

Quizplus · Accepted Answer

To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should adjust assets and liabilities such that its duration gap is equal to zero. This means that the duration of the assets and liabilities should be equal, so that any changes in interest rates will affect both sides of the balance sheet equally, resulting in no change in the economic value of equity. Adjusting the duration gap to one or greater than zero (choices A and B) or adjusting the GAP to zero or less than one (choices D and E) may provide some level of protection, but will not fully immunize the bank's equity value from interest rate risk.

To Perfectly Immunize a Bank's Economic Value of Equity from Changes