Duration Gap Calculation

Duration gap calculation measures the sensitivity of a financial institution’s net worth to interest rate changes. It involves estimating the average time until assets and liabilities, like loans and deposits, are repriced or paid off (called their durations). The gap is the difference between the weighted durations of assets and liabilities. A positive duration gap means assets are more sensitive to interest rate changes than liabilities, risking potential gains or losses depending on rate movements. It helps institutions manage interest rate risk by understanding how their value might fluctuate with changes in interest rates.