Duration gap and interest rate risk

Interest rate risk can affect in two ways: The most immediate impact would be on Net Interest Income (NII). However, if interest rates continue to change for a longer duration the long term impact would be on bank’s balance sheet. As a result, it will influence bank’s net worth, assets, liabilities and its off-balance sheet positions due to changes in interest rate levels. As, NII is directly dependent on the patterns of interest rates, any mismatches in cash flow debunks NII rate risk because a rise in interest rates could cause it to lose a lot of its capital. Clearly, income gap analysis and duration gap analysis are useful tools for telling a financial institution manager the institution’s degree of exposure to interest-rate risk. Duration Gap Analysis 29 STUDY GUIDE The duration gap is the difference between the Macaulay duration and the investment horizon. When the investment horizon is greater than the Macaulay duration of the bond, coupon reinvestment risk dominates price risk. The investor's risk is to lower interest rates. The duration gap is negative. When the investment horizon is equal to the Macaulay duration of the bond, coupon reinvestment risk offsets price risk. The investor is hedged against interest rate risk. The duration gap is zero

A duration gap measure that takes into account a bank's overall exposure to interest rate risk. It is calculated as the difference between the modified duration of the assets and liabilities adjusted by the bank's financial leverage. Duration is a measure of how rapidly the prices of interest sensitive securities change as the rate of interest changes (see application example in the ALM section). For example, if the duration of a security works out to 2 this means that for a 1% increase in interest rates the price of the instrument will decrease by 2%. Interest Rate Risk Management using Duration Gap Methodology will change when interest rates change. This analysis requires that a bank to specify a performance target (the market value of equity or net interest income) and strategically manage the difference between the average duration of total assets and the average duration of total Measuring Interest Rate Risk with Duration GAP Economic Value of Equity Analysis Focuses on changes in stockholders’ equity given potential changes in interest rates Duration GAP Analysis Compares the price sensitivity of a bank’s total assets with the price sensitivity of its total liabilities to assess the impact of potential changes

6 Sep 2019 Although short-term interest rate risk is a concern to some investors, The investor's risk is to higher interest rates, and the duration gap is 

the risk. A financial institution's net worth exposure to interest rate shocks is directly related to its leverage adjusted duration gap as well as its asset size: R. R . A. measure interest rate risk – known as 'gap' and 'duration' analysis. The impact of unanticipated changes in interest rates: • on profitability. – Net Interest Income  about managing the risk their institutions face as result of greater interest-rate fluctuations and defaults by borrowers. Keywords: risk management, interest- rates risk, income gap. rate risk, called duration gap analysis. This analysis is  Interagency Advisory-Interest Rate Risk Management 21. EXAMINATION and reflects how the duration of an instrument changes as rates change. ←. RISK Gap analysis is a simple IRR methodology that provides an easy way to identify  risk), maturities (liquidity risk), and repricing. (interest rate risk). Once these risks have been identified and measured, usually through gap analysis, MFI 

rate risk because a rise in interest rates could cause it to lose a lot of its capital. Clearly, income gap analysis and duration gap analysis are useful tools for telling a financial institution manager the institution’s degree of exposure to interest-rate risk. Duration Gap Analysis 29 STUDY GUIDE

est-rate risk because a rise in interest rates could cause it to lose a lot of its capital. Clearly, income gap analysis and duration gap analysis are useful tools for telling a financial institution manager the institution’s degree of exposure to interest-rate risk. Maturity Gap Analysis and Duration Gap Analysis Maturity Gap Analysis The simplest analytical techniques for calculation of IRR exposure begins with maturity Gap analysis that distributes interest rate sensitive assets, liabilities and off-balance sheet positions into a certain number of pre-defined time-bands according to their maturity (fixed

Interest Rate Risk Management using Duration Gap Methodology. Dan Armeanu Florentina-Olivia Balu Carmen Obreja Academia de Studii Economice, 

17 Oct 2015 The duration gap between their liabilities and assets typically widens implies that the duration gap [gap between interest rate sensitivity of  If you intend to hold a bond or other debt until it matures then there is no interest rate risk to you. The value of the bond at the date of maturity is kknown and will  So, in case of mortgages.. if a bank gives out a loan with a certain interest rate to a person so they can buy the house (mortgage), but they find themselves in the 

9A(1)-2. Duration Gap Analysis. 1. Examines the sensitivity of the market value of the financial institution's net worth to changes in interest rates. %. 1. (. ) %.

The duration gap is the difference between the Macaulay duration and the investment horizon. When the investment horizon is greater than the Macaulay duration of the bond, coupon reinvestment risk dominates price risk. The investor's risk is to lower interest rates. The duration gap is negative. When the investment horizon is equal to the Macaulay duration of the bond, coupon reinvestment risk offsets price risk. The investor is hedged against interest rate risk. The duration gap is zero

Keywords: re-pricing gap analysis, time bucket sensitivity, duration gap analysis. In consequence, if GAP = 0, the bank is immune to the interest rate risk and. Interest rate swaps can be used to mitigate duration gap. • Depository banks under the FED's jurisdiction are mandated not to carry interest rate risk above a  The investor's risk is to lower interest rates. The duration gap is negative. When the investment horizon is equal to the Macaulay duration of the bond, coupon  31 Jul 2013 Once the duration of analyzed group of assets is derived, a bank can use duration gap analysis to determine the exposure to interest rate risk. 4 Nov 2010 2009 on introduction of Duration Gap Analysis for interest rate risk As banks are aware, interest rate risk is the risk where changes in  A negative duration gap is when the duration of assets is less than the duration of liabilities (which means greater exposure to declining interest rates). If rates go  framework that includes sophisticated concepts such as duration matching, variable- rate pricing perspective. interest rate sensitivity and gAP management.