When DGAP 0, DA must be above DL. An interest rate increase will lead to a fall in the value of both the asset and the liability, but, since it has the higher duration, the price of the asset will fall further; that is, we will lose.

Question

When DGAP > 0, DA must be above DL. An interest rate increase will lead to a fall in the value of both the asset and the liability, but, since it has the higher duration, the price of the asset will fall further; that is, we will lose.

Quizplus · Accepted Answer

When DGAP (Duration Gap) is greater than zero, it indicates that the duration of assets (DA) is greater than the duration of liabilities (DL). An increase in interest rates will cause the value of both assets and liabilities to decrease, but the assets, having a higher duration, will decrease more in value, leading to a loss.

When DGAP > 0, DA Must Be Above DL