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Consider the formula for the interest rate gap: Gap = Amount of IR-sensitive Assets - Amount of IR-sensitive Liabilities Banks would like to have a negative gap if they expect that future interest rates will interest rate-sensitive assets than interest rate-sensitive liabilities. Now consider the formula for the duration gap: Duration gap = Asset Duration - Liability Duration x Liability Asset . This means that banks should hold where Asset is the market value of the asset, Liability is the market value of the liability, and duration is the weighted average Σχ. (1+1) Payment of times until payment, with their weights proportionate to the present value of the payment: Duration = t=! n Размени t=1 (1+r) The duration formula implies that if interest rates increase, duration will the gap will increase, if the interest rate change affects the value of the bank's assets liabilities. The duration gap formula implies that, ceteris paribus, than it affects the value of its

Consider the formula for the interest rate gap: Gap = Amount of IR-sensitive Assets - Amount of IR-sensitive Liabilities Banks would like to have a negative gap if they expect that future interest rates will interest rate-sensitive assets than interest rate-sensitive liabilities. Now consider the formula for the duration gap: Duration gap = Asset Duration - Liability Duration x Liability Asset . This means that banks should hold where Asset is the market value of the asset, Liability is the market value of the liability, and duration is the weighted average Σχ. (1+1) Payment of times until payment, with their weights proportionate to the present value of the payment: Duration = t=! n Размени t=1 (1+r) The duration formula implies that if interest rates increase, duration will the gap will increase, if the interest rate change affects the value of the bank's assets liabilities. The duration gap formula implies that, ceteris paribus, than it affects the value of its

MACROECONOMICS
MACROECONOMICS
14th Edition
ISBN:9781337794985
Author:Baumol
Publisher:Baumol
Chapter14: The Financial Crisis And The Great Recessio
Section: Chapter Questions
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Consider the formula for the interest rate gap: Gap = Amount of IR-sensitive Assets - Amount of IR-sensitive Liabilities Banks would like to have a negative gap if they expect that future interest rates will interest rate-sensitive assets than interest rate-sensitive liabilities. Now consider the formula for the duration gap: Duration gap = Asset Duration - Liability Duration x Liability Asset . This means that banks should hold where Asset is the market value of the asset, Liability is the market value of the liability, and duration is the weighted average Σχ. (1+1) Payment of times until payment, with their weights proportionate to the present value of the payment: Duration = t=! n Размени t=1 (1+r) The duration formula implies that if interest rates increase, duration will the gap will increase, if the interest rate change affects the value of the bank's assets liabilities. The duration gap formula implies that, ceteris paribus, than it affects the value of its
Transcribed Image Text:Consider the formula for the interest rate gap: Gap = Amount of IR-sensitive Assets - Amount of IR-sensitive Liabilities Banks would like to have a negative gap if they expect that future interest rates will interest rate-sensitive assets than interest rate-sensitive liabilities. Now consider the formula for the duration gap: Duration gap = Asset Duration - Liability Duration x Liability Asset . This means that banks should hold where Asset is the market value of the asset, Liability is the market value of the liability, and duration is the weighted average Σχ. (1+1) Payment of times until payment, with their weights proportionate to the present value of the payment: Duration = t=! n Размени t=1 (1+r) The duration formula implies that if interest rates increase, duration will the gap will increase, if the interest rate change affects the value of the bank's assets liabilities. The duration gap formula implies that, ceteris paribus, than it affects the value of its
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