Interest Rate Risk Management using Duration Gap Methodology

• Main Authors: Dan Armeanu, Florentina-Olivia Balu, Carmen Obreja
• Format: Article
• Language: English
• Published: General Association of Economists from Romania 2008-01-01
• Series: Theoretical and Applied Economics
• Subjects: interest rate; risk; management; assets and liabilities; duration gap; bank; interest rate risk
• Online Access: http://store.ectap.ro/articole/273.pdf
• ISSN: 1841-8678; 1844-0029

The world for financial institutions has changed during the last 20 years, and become riskier and more competitive-driven. After the deregulation of the financial market, banks had to take on extensive risk in order to earn sufficient returns. Interest rate volatility has increased dramatically over the past twenty-five years and for that an efficient management of this interest rate risk is strong required. In the last years banks developed a variety of methods for measuring and managing interest rate risk. From these the most frequently used in real banking life and recommended by Basel Committee are based on: Reprising Model or Funding Gap Model, Maturity Gap Model, Duration Gap Model, Static and Dynamic Simulation. The purpose of this article is to give a good understanding of duration gap model used for managing interest rate risk. The article starts with a overview of interest rate risk and explain how this type of risk should be measured and managed within an asset-liability management. Then the articles takes a short look at methods for measuring interest rate risk and after that explains and demonstrates how can be used Duration Gap Model for managing interest rate risk in banks.