The most appropriate strategy for mitigating the risk associated with a large portfolio of long-term, fixed-rate mortgages is to hedge the interest rate exposure using interest rate derivatives. For example:

• The bank could enter into interest rate swaps, where it pays a fixed rate and receives a floating rate, effectively offsetting the fixed-rate exposure of the mortgage portfolio.
• This approach allows the bank to manage interest rate risk without liquidating assets or significantly altering its business model.

A is incorrect: Increasing rates on new mortgages doesn’t protect the bank from losses on existing fixed-rate mortgages. C is incorrect: Selling off a large portion of the mortgage portfolio could result in significant losses and disrupt the bank’s business. D is incorrect: Encouraging refinancing shifts the risk to the borrowers, which is not a sound risk management strategy for the bank.