What conclusions can you draw from the duration gap in your answer to the previous question?
A)The market value of the dealer's equity decreases slightly if interest rates fall.
B)The market value of the dealer's equity becomes negative if interest rates rise.
C)The market value of the dealer's equity decreases slightly if interest rates rise.
D)The market value of the dealer's equity becomes negative if interest rates fall.
E)The dealer has no interest rate risk exposure. [Refer to: 9-80]

Question

Quizplus · Accepted Answer

The duration gap measures the sensitivity of the dealer's equity to changes in interest rates. A positive duration gap means the market value of the dealer's equity will decrease if interest rates rise, while a negative duration gap means the market value of the dealer's equity will decrease if interest rates fall. Since the duration gap in the previous question is slightly positive, it means the market value of the dealer's equity will decrease slightly if interest rates rise. Therefore, the best choice is C. Option A and D are incorrect because the duration gap is slightly positive, indicating that the dealer's equity value will decrease slightly with rising interest rates, not fall significantly, as suggested by options A and D. Option B is incorrect because a slightly positive duration gap does not mean the market value of the dealer's equity will become negative with rising interest rates. Option E is incorrect because the duration gap suggests that the dealer has some interest rate risk exposure, although it may be small.

What Conclusions Can You Draw from the Duration Gap in Your