How can a negative duration gap of 0.21 years be interpreted?
A)The FI is exposed to decreasing interest rates because it has a negative duration gap of 0.21 years.
B)The FI is exposed to increasing interest rates because it has a negative duration gap of 0.21 years.
C)The FI is not exposed to interest rate changes since it is running a matched book.
D)The FI's exposure will depend on its maturity gap.

Question

Quizplus · Accepted Answer

The FI is exposed to decreasing interest rates because it has a negative duration gap of 0.21 years. This means that the FI's assets have a shorter duration than its liabilities, so if interest rates decrease, the value of the FI's assets will increase more than the value of its liabilities, resulting in a gain for the FI.

How Can a Negative Duration Gap of 0