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CMA Final · Risk Management in Banking and Insurance · Interest Rate Risk Management

A bank has assets of Rs 5,000 crore with duration 3 years and liabilities of Rs 4,500 crore with duration 2 years. Ignoring convexity and assuming equal yield changes, the duration gap is approximately (in years):

The duration gap is 1.2 years. It equals asset duration minus the liabilities-to-assets ratio times liability duration: 3 minus 0.9 times 2, which is 1.2. The leverage weighting is essential; plain subtraction of durations gives the wrong figure.

  1. A1.00
  2. B1.20Correct
  3. C0.60
  4. D2.10

Explanation

Duration gap = DA - (L/A) x DL = 3 - (4,500/5,000) x 2 = 3 - 1.8 = 1.2 years. Simply subtracting durations gives 1.00, ignoring leverage. Positive gap means equity value falls when rates rise.

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