Portfolio Duration Gap Risk Mgmt

# Portfolio Duration Gap Risk Mgmt - Portfolio Duration Gap...

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Portfolio Duration Gap Risk Mgmt 1 The first step is to separately calculate the weighted-average duration for the portfolio assets and liabilities. The duration of the portfolio is the market-value, weighted-average of the individual durations on Suppose the FI calculates duration at: DA = 5-years and DL = 3-years Assets \$100.00 Liabilities \$90.00 Equity \$10.00 Total Assets \$100.00 Total Liabilities & Equity \$100.00 Liabilities & Equity

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2 The FI Manager calculates the potential loss: E = -[ DA – DLk] [A] [ R/(1+R)] ∆E = -[5 - (3)(.9)] x (\$100 million) x (.01/1.1) = \$- 2.09 million If rates changed by 1%, the FI could lose \$2.09 million. Using the formula, ΔP/P = (-D) [ΔR/(1+R)], Assets \$100.00 Liabilities \$90.00 \$95.45 Liabilities \$87.54 Equity \$10.00 \$7.91 Total Assets \$100.00 Total Liabilities & Equity \$100.00 \$95.45 Total Liabilities & Equity \$95.45 Liabilities & Equity Portfolio Duration Gap Risk Mgmt
3 To counter this impact, the FI Manager could reduce the leverage-adjusted duration gap to zero: E = - [ DA – DL k ] [ A ] [ R/(1+R)] = 0 years ∆E = - (0 ) ( A )( R/(1+R)) = 0 years

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## Portfolio Duration Gap Risk Mgmt - Portfolio Duration Gap...

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