Question

Focus of GAP and Duration Gap and which is more inclusive.

Focus of GAP and Duration Gap and which is more inclusive.

Homework Answers

Answer #1

Income Gap or GAP Analysis measures how the net income of a financial institute will change in reaction to market interest rate change. It is basically interest rate sensitivity of the net income. It depends on the determination of assets and liabilities of the financial institute which will be affected by interest rate change and the quantification of the effect due to the interest rate change.

Duration GAP analysis on the other hand measures the interest rate sensitivity of the Market value of the net worth of the Financial institute. First the duration of the assets and liabilities of the financial institute are determined and then the effect of interest rate change over the net worth is calculated.

Duration GAP analysis should be more inclusive as it considers the average lifetime of the stream of payments of a financial instrument .

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