Market risk and reinvestment risk underscore the need for:

The correct answer is A. asset-liability matching. Asset-liability matching directly addresses both market risk and reinvestment risk by aligning the duration and cash flows of assets to the timing and amount of liabilities - when they're matched, changes in interest rates affect both sides similarly, neutralizing the net…

Question

Options

Aasset-liability matching
Brevenue-risk matching
CPrepayment risk
Dcredit reinsurance

How the community answered

(50 responses)

A
78% (39)
B
6% (3)
C
2% (1)
D
14% (7)

Explanation

Asset-liability matching directly addresses both market risk and reinvestment risk by aligning the duration and cash flows of assets to the timing and amount of liabilities - when they're matched, changes in interest rates affect both sides similarly, neutralizing the net exposure.

Why the distractors are wrong:

B (revenue-risk matching) is not a recognized financial risk management framework; it conflates revenue with asset cash flows and has no standard meaning in this context.
C (prepayment risk) is a type of risk (borrowers paying early, disrupting expected cash flows), not a strategy for managing risk - it's actually one of the problems asset-liability matching helps address.
D (credit reinsurance) is an insurance mechanism for transferring credit default exposure, unrelated to interest rate-driven market or reinvestment risk.

Memory tip: Think of it as "matching your promises with your resources" - a pension fund knows it owes payments in 20 years, so it holds assets that mature in 20 years. Market rates move, but both sides move together. ALM = duration immunity.

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