Question

To immunize its net worth from changes in interest rates, the duration of an intermediary’s assets...

To immunize its net worth from changes in interest rates, the duration of an intermediary’s assets should_______ the leverage-adjusted duration of its liabilities

a) exceed

B) roughly equal

c) be less than

d) fluctuate more than

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Answer #1

B) Roughly equal

Duration matching means to make the duration of assets and liabilities equal. Interest rate changes makes the values of assets and liabilities change by (approximately) the same amount. for nullifying the effect duration of assets and liabilities shall be roughly equal by which there is no impact of any changes in interest rate on P&L Balance sheet and Net worth of organisation.

So to immunize its net worth from changes in interest rates, the duration of an intermediary assets should approximately equal to the leverage- adjusted duration of its liabilities.

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