2016-FRR Exam Dumps | The technique of using interest rate swap positions to reduce the effect of the variability of interest

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GARP.2016-FRR.v2025-06-21.q161
Question 135

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Question 135/161

The technique of using interest rate swap positions to reduce the effect of the variability of interest rates on net interest income is known as:

A. Inoculation

B. Vaccination

C. Immunization

D. Insulation

Correct Answer: C

Comprehensive and Detailed In-Depth Explanation:
Immunization is a risk management strategy used by banks to protect their net interest income or portfolio value from interest rate fluctuations. It involves structuring assets and liabilities (often using interest rate swaps) so that the duration of assets matches the duration of liabilities, thereby neutralizing the impact of rate changes. In the context of interest rate swaps, a bank might enter into a swap to convert floating-rate exposures to fixed rates (or vice versa) to stabilize net interest income. The term "immunization" is well- established in financial risk management and is referenced in GARP's FRR materials under interest rate risk management. Inoculation, vaccination, and insulation are not standard terms for this technique.
Reference:GARP FRR Study Notes, Market Risk Section; BCBS, "Principles for the Management and Supervision of Interest Rate Risk," July 2004, para. 30-35.

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