9-37 Setting the duration of the assets higher than the duration of the liabilities will exactly immunize the net worth of an FI from interest rate shocks.

Question

Quizplus · Accepted Answer

Setting the duration of assets higher than the duration of liabilities only provides partial immunization from interest rate shocks. If interest rates rise, the value of the assets will decrease more than the value of the liabilities, causing a decrease in net worth. A complete immunization strategy also includes adjusting for convexity and basis risk.

9-37 Setting the Duration of the Assets Higher Than the Duration