A an average asset duration of 4.7 years and an average liability duration of 3.3 years.This bank has $750 million in total assets and $500 million in total liabilities.This bank's leverage-adjusted duration gap is a:
A)positive gap of 8.0 years.
B)negative gap of 2.5 years.
C)positive gap of 1.4 years.
D)positive gap of 2.5 years.
E)None of the options is correct.

Question

Quizplus · Accepted Answer

The leverage-adjusted duration gap is calculated as the asset duration minus the liability duration, adjusted for the leverage ratio. The formula is: $ \text{Leverage-adjusted duration gap} = D_A - D_L \times \frac{L}{A} $, where $D_A$ is the asset duration, $D_L$ is the liability duration, $L$ is the total liabilities, and $A$ is the total assets. Plugging in the given values: $4.7 - 3.3 \times \frac{500}{750} = 4.7 - 2.2 = 2.5$ years. Therefore, the bank has a positive gap of 2.5 years.

A an Average Asset Duration of 4