Duration GAP Analysis
Duration GAP Analysis
Duration GAP Analysis
• Rupee GAP analysis focuses on net interest income rather than equity value. Duration GAP is an
alternative approach of interest rate risk management. Duration simply refers to the weighted
average time period required to realize all cash flows from an investment.
• Duration GAP is the difference between the duration of bank's assets and its liabilities. It is used
to measure of interest sensitivity that explains how a change in market interest rate affects the
market value of a bank's assets, liabilities and its net worth or equity.
• It is calculated as
a. Duration =
∑ PV ( CFt ) Xt or
TPV
1+ Y ( 1+Y )+ n(C−Y )
Duration = −
Y c [ ( 1+ Y ) n−1 ] +Y
n = Number of period
Dur ation
b. Modified Duration =
1+r / c
Modified duration is the price elasticity of an instrument with respect to changes in interest rate. It
represents the percentage changes in the present value of financial instruments for a given percentage
points change in market yield.
Solution,
Calculation of duration
Duration =
∑ PV ( CFt ) Xt =
3,837,170
= 4.14 yrs.
TPV 927,880
Alternatively,
Duration 4.14
Modified Duration = = = 3.70 yrs.
1+r /c 1+ 0.12/1
If interest rate is increase by 150 basis point, the percentage change in loan price is: