If a financial institution has equated the dollar effects of interest rate risk on its assets with the dollar effects on its liabilities, it has engaged in:
A)a long hedge.
B)a short hedge.
C)a protected swap.
D)immunizing interest rate risk.
E)None of the above.

Question

Quizplus · Accepted Answer

Immunizing interest rate risk involves matching the dollar effects of interest rate changes on a financial institution's assets and liabilities, which reduces the institution's exposure to fluctuations in interest rates. This is achieved through a process called duration matching, where the durations of the assets and liabilities are matched in a way that the impact of interest rate changes on both sides is equal.

If a Financial Institution Has Equated the Dollar Effects of Interest