Duration gap is not the interest rate gap the

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Unformatted text preview: *Δr/(1+r) Duration Gap Dgap Size Interest Rate Shock 29 If Dgap > 0 ►A As rates go up As rates go down ► A >L >L ►E ►E <L <L ►E ►E If Dgap < 0 As rates go up ►A As rates go down ► A 30 The Duration Gap Confusion? Duration Gap is Not the interest rate gap the financing gap Impact of Δr on B/S Impact of Δr on I/S Liquidity Risk 31 Advantages of Duration Analysis • One number tells all • Easy calculation • Theoretically sound 32 Disadvantages of Duration Analysis • Duration is static • Flat term Structure • Parallel shift assumption • No convexity r r Price Price 33 Default risk Imbedded options (call, Put, Conversion..) 34 Example B/S Cash 100 6-year Gvt Sec (8%) 200 3-year Loan (12%) 700 (interest Only Loan) 1-year CD (5%) 3-year CD (7%) (Annual Pmts) Equity 620 300 80 Duration of Govt Securities is 4.99 years 35 Question : Δ E if Δ r = 1%? ΔE = - [DA - DL * (L/A)] *A *Δr/(1+r) 36 37 Note rAssets ≠ rLiabilities Δ A = - D A * A * Δ r/(1+r) Δ...
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This note was uploaded on 03/12/2014 for the course FINE 442 at McGill.

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