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CMA Final · Strategic Financial Management · Risks in Financial Market

A bank has rate-sensitive assets of ₹1,000 crore with a duration of 3 years and liabilities of ₹900 crore with a duration of 2 years. Market interest rates are 8% and rise instantly by 1 percentage point. Using the duration gap approach, the approximate change in the market value of equity is:

Equity value falls by about ₹11.11 crore. The leverage-adjusted duration gap is 3 minus 0.9 × 2, which is 1.2 years. Multiplying by assets of ₹1,000 crore and a 1% rate rise, then dividing by 1.08, gives the loss. Positive gap means rising rates hurt.

  1. AFall of ₹11.11 croreCorrect
  2. BFall of ₹12.00 crore
  3. CFall of ₹9.26 crore
  4. DRise of ₹11.11 crore

Explanation

Duration gap = 3 − (900/1000 × 2) = 1.2 years. Change in equity ≈ −1.2 × 1,000 × 0.01 / 1.08 = −₹11.11 crore. ₹12.00 crore omits the division by 1.08. ₹9.26 crore uses an unweighted gap of 1 year. A rise has the wrong sign, since a positive gap loses value when rates rise.

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