The larger an FI's absolute leverage adjusted duration gap:
A)the less exposed the FI is to interest rate shocks
B)the more exposed the FI is to interest rate shocks
C)the lower the FI's net worth
D)None of the listed options are correct.

Question

Quizplus · Accepted Answer

The duration gap is a measure of an FI's sensitivity to interest rate changes. A positive duration gap indicates that the FI has more rate-sensitive assets than liabilities, meaning that an increase in interest rates will have a positive impact on net interest income. However, a larger absolute leverage-adjusted duration gap means that the FI is more exposed to interest rate shocks, as a dramatic increase in interest rates could lead to a significant decline in its net worth. Therefore, B is the best choice.

The Larger an FI's Absolute Leverage Adjusted Duration Gap