For the love of physics walter lewin may 16, 2011 duration. Pdf the world for financial institutions has changed during the last 20 years, and become riskier. Gap analysis is one of the rst methods to measure the interest rate risk exposed by the liquidity risk of banks. Dan armeanu 2008 analyzes the interest rate risk by using duration gap model, and it turns out that the interest rate risk exposes commercial banks to the possibility of a great loss, so. Gap analysis templates in pdf can also be of great help to you in making the perfect analysis you need for your business entity. The next part will discuss strengths and weaknesses of duration analysis. The difference between the duration of assets and liabilities held by a financial entity overview.
Gap analysis was widely used in the 1980s, typically in tandem with duration analysis. The application of duration analysis requires extensive data onthe specific characteristics and current market pricing schedules of financialinstrument. Some limitations of this type of analysis are the lack of. Interest rate risk irr points towards the potential loss. Pdf duration gap analysis revisited method in order to improve. A guide to performing a needs assessment and a gap analysis. Interest rate risk in icici bank by using gap analysis technique banks can also use sensitivity.
A gap analysis can be used while developing an employee benefit program. A gap analysis can be defined as the determination of the difference between current knowledgepractices what we are doing and current evidence based practices what we should be doing. The difference between fixed rate liabilities and fixed rate assets. A tool that measures the mismatch between a firms assets and liabilities. The method provides a way to identify suboptimal or missing strategies, structures, capabilities, processes, practices, technologies or skills, and then recommends steps. Moreover, it considers immunization, hedging and duration gap analysis as practical applications. Duration gap analysis based on the information provided in example 1, use equation 2 to determine the duration gap for first national bank. Interest rate risk an overview sciencedirect topics.
A simple maturity gap analysis, as described by the regulator, can be easily. This is one of the mismatches that can occur and are known as assetliability mismatches. Gap analysis focuses on what the current performance of a business is as opposed to what the market wants from the business. The application of duration analysis requires extensive data on the specific.
An analysis of the duration gap concept and its use as a tool to measure and manage interest rate risk is presented. The duration gap is a financial and accounting term and is typically used by banks, pension funds, or other financial institutions to measure their risk due to changes in the interest rate. Gap analysis is carried out as a comparison of actual performance with potential or desired performance 34 3536 and not as a massive geographic information system gisbased analysis for. Dur gap dur a where dur a average duration of assets 2. This analysis requires that a bank to specify a performance target the market value of equity or net interest income and strategically manage the difference between the average duration of total assets and the average duration of total. In modern economy, interest rate is regarded as the price of capital. Duration gap analysis session 6 bond duration bonds. A gap analysis is applicable to any aspect of industry where performance improvements are desired. More specifically, it is calculated as difference between the weighted duration of assets minus the product of the weighted duration of liabilities and the ratio of total liabilities to total assets. Analysis has an important role in our everyday life, especially at work.
Pdf interest rate risk management using duration gap. Following further analysis, it was decided to incorporate an allocation to strip bonds in addition to the dex universe and long bond allocations. The duration gap model risk management and shareholders. The difference between the duration of assets and liabilities held by a financial. It is a measure of the sensitivity of the value of the balance sheet to changes in market interest rates. Gap analysis will often focus on one or more of the following perspectives. An alternative method for measuring interestrate risk, called duration gap analysis, examines the sensitivity of the market value of the financial institutions net. In duration gap analysis, the duration of assets and liabilities are matched instead of matching the maturity or repricing dates. Gap analysis is a general tool and as such it can be used at different granularities, for example, at an organization level, as part of project management, or for strategy development. Duration gap analysis valueatrisk analysis horizontal and vertical aspects 1 introduction interest rate is one of the most crucial economic variables in economics dellariccia et al. Duration gap duration gap model focuses on managing the market value of stockholders equity the bank can protect either the market value of equity or net interest income, but not both duration gap analysis emphasizes the impact on equity compares the duration of a banks assets with the duration of the banks liabilities and examines how the. This might be achieved by changing the objectives, or by changing strategy at the. To make sure that you understand income gap and duration gap analysis, you should be able to verify that if interest rates fall from 10% to 5 %, the first national bank will find its income increasing and the market value of its net worth rising. Duration gap analysis duration is a measure of change in the value of the portfolio due to change in interest rates.
Utilizing duration gap a financial institution may select a wide range of values for its appropriate duration gap by structuring its balance sheet appropriately. A negative duration gap means that the market value of equity will increase when interest rates rise this corresponds to a reinvestment position. Gap analysis is a useful way to determine the untapped potential of a businesss performance. Duration of an asset or a liability is computed by calculating the weighted average value of all the cashflows that it will produce with. Which of the following is not a weakness of duration gap. Duration gap duration gap is the difference between the average duration of assets and the average duration of liabilities. To immunize its target account, it must set the appropriate duration gap to zero. Duration gap analysis appendix 1 to chapter 10 duration. Interest rate risk management using income gap analysis. A gap analysis is a tool to narrow the gap between perceptions and reality, thus enhancing customer satisfaction. Key components of gap analysis as said earlier, gap analysis compares the gap between an organizations actual performance against its potential performance.
It is important to perform a gap analysis to justify the necessity for the educational activity and to guide you to select the appropriate teaching and evaluation methods. A gap analysis is process that compares actual performance or results with what was expected or desired. Duration analysis is based on macaulays concept of duration, which measures the average lifetime of a securitys stream of payments described in the appendix to chapter 4. Duration gap analysis is an effective way to protect the economic values of banks from exposure to interest rate risk. Duration gap directly indicates the effect of interest rate changes on the net worthof the institution. Interest rate risk stemming from liquidity risk, gap and. This analysis is used to determine whether it is meeting expectations and. Value rate duration 1yr time deposit 520 9% 1 4yr cd 400 10% 3. Assetliability management to control the volatility in. Gap analysis can be understood as a strategic tool used for analyzing the gap between the target and anticipated results, by assessing the extent of the task and the ways, in which gap might be bridged. A guide for practitioners on how to bridge skills gaps example.
My following essay defines duration according to macaulay and presents special terms from the practice. Wed like to understand how you use our websites in order to improve them. Bank analysis alm interest rate risk duration gap and. International journal of academic research in business and social sciences jan 2016, vol. It is considered harder to use and less widely implemented than duration analysis, but it can still be used.
Gap analysis is concerned with why the gap occurs and the development of measures for reducing or eliminating it. Gap method another name of this method is a method of reevaluation. Study guide to make sure that you understand income gap and duration gap analysis, you should be able to verify that if interest rates fall from 10% to 5 %, the first bank will find its income increasing and the market value of its net worth rising. In other words, a decrease in interest rates with a negative duration gap will cause capital to fall, while an increase in. The same goes with how important it is for entities within the healthcare industry to develop and use an efficient healthcare gap analysis. Duration analysisduration analysis is defined as the average life of a financial instrument. It concludes with todays importance of duration analysis. Maturity gap analysis and duration gap analysis mba. Interest rate risk management using duration gap methodology will change when interest rates change. Gap analysis is the process companies use to examine their current performance with their desired, expected performance. Interest rate gap is a measurement of exposure to interest rate risk. A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank with a duration gap of 1. Gap analysis is a method of estimating the difference in performance between a businesss software tools to determine whether the business specifications are met or not. Selected best practices and suggestions for improvement tool d.
Business evaluation is usually performed to examine specific data to improve the business, but one popular analysispossibly the easiest since it targets four big pointsis known as swot analysis. This study used gap analysis for measuring the interest. It involves making a comparison of the present performance level of the entity or business unit with that of standard established previously. Managing interest rate risk duration gap analysis youtube. Duration gap duration gap model focuses on either managing the market value of stockholders equity the bank can protect either the market value of equity or net interest income, but not both duration gap analysis emphasizes the impact on equity compares the duration of a banks assets with the duration of the banks liabilities and examines how the. Duration of an asset or a liability is computed by calculating the weighted average value of all the cashflows that it will produce with each cashflow weighted by the time at which it occurs. A n alternative method for measuring interestrate risk, called duration gap analysis, examines the sensitivity of the market value of the financial institutions net worth to changes in interest rates. Conclusion of duration gap analysis duration gap analysis indicate that the bank will suffer from a rise in interest rates. Duration gap model dagap duration is defined as the average life of a financial instrument. Duration gap analysis based on the information provided in example 1,use equation 2 to determine the duration gap for first bank. So, you typically list out the organizations current state, its desired state, and a comprehensive plan to fill out the gap between these two states. Duration gap analysis revisited method in order to improve. Duration gap analysis revisited method in order to improve risk. This analysis is based on macaulays concept of duration, which measures the average lifetime of a securitys stream of payments 4.
They identify four steps in the duration gap analysis. Needs assessment, but it allows for a more standardized process of determining what the gapinknowledge or need is. Duration gap analysis focuses on changes in net interest income. Duration gap analysis revisited method in order to improve risk management.
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