5. Risk management: Gap analysis vs duration analysis Consider the formula for the interest rate gap: Gap = Amount of IR-sensitive Assets - Amount of IR-sitwidve Liablinies Banks would like to have a positive gap if they expect that future interest rates will This means that banks should held interest rate-sensitive assets than interest rate-sensitive liabilities. Now consider the formula for the duration gap: Banks would like to have a positive gap if they expect that future interest rates will interest rate-sensitive assets than interest rate-sensitive llabilities. This means that bonks should hold Now consider the formula for the duration gap: Duration gop = Asset Duration - Liabilily Duration AarMatiay Where Axset is the market value of the asset, Liability is the market value of the liability, and duration is the neighted average of times until payment, with their weights proportionate to the present value of the payment Dunation =2i=2i(im0+1min), The duration formula implies that if interest rates decrease, duration will The duration gap formula implies that, cetems paribes, the gap will increase, if the interest rate change affects the value of the bank's assets than it affects the value of its Habilities