Uses of Maturity Gap and Duration Gap
Not what you're looking for?
a. Explain how portfolio managers can use maturity gap and duration gap to measure their exposure to interest-rate risk.
b. Explain how portfolio managers can use financial options and futures to hedge interest-rate risk.
c. Describe how portfolio managers use financial swaps to control their risk exposure. Explain how both parties in an agreement can benefit from a swap.
Purchase this Solution
Solution Summary
This solution discusses the uses of maturity gap and duration gap to measure the exposure to interest-rate risk, hedging, and use of financial swaps.
Solution Preview
See the attached file.
a. Explain how portfolio managers can use maturity gap and duration gap to measure their exposure to interest-rate risk.
Maturity Gap focuses on equity value changes and ignores cash flow timing. Portfolio managers measure the difference between a firm's weighted average asset maturity (MA) and weighted average liability maturity (ML).
Maturity Gap = (MA - ML)
MA = WA1MA1 + WA2MA2 + WA3MA3 + ... + WAnMAn
ML = WL1ML1 + WL2ML2 + WL3ML3 + ... + WLnMLn
WAi = (market value of asset i)/(market value of total assets).
WLi = (market value of liability j)/(market value of total liabilities)
MAi is the maturity of asset i.
MLi is the maturity of liability j.
Here
• When (MA - ML) > 0 then an increase (decrease) in interest rates is expected to decrease (increase) a financial firm's equity.
• When (MA - ML) < 0 then an increase (decrease) in interest rates is expected to increase (decrease) a financial firm's equity.
Equity = Assets - Liabilities
or in change form,
Δ Equity = Δ Assets - ΔLiabilities
Equity, Assets and Liabilities are measured in market value.
On the other hand Duration Gap -focuses on equity value including cash flow timing and is considered as the most complete and accurate measure of ...
Education
- BSc, Dokuz Eylul University
- MBA, Texas A&M University-Kingsville
Recent Feedback
- "Thanks"
- "Thanks"
- "This is a great help...Thank you"
- "Thanks for the advice!"
- "Oh my gosh u are awesome... A++"
Purchase this Solution
Free BrainMass Quizzes
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.