aidebaobao

IMHO What is a "regular" Duration Gap if this is a "Leverage-Adjusted" Duration Gap? A
"regular" gap should be the difference between a measure of the Duration of the Assets and the Duration of the Liabilities. Makes sense. (Da-Dl) seems like a logical elementary formula for a gap of duration if the only holdings of a company are the assets and the liabilities. If you want to calculate DD you can include and multiply by the .01 but this post is about LADG.

If you want to calculate the "Leverage-Adjusted" duration gap, you adjust for leverage on the duration gap. CFAI uses "k" as the "Leverage-Adjuster." The Leverage Adjuster is L/A. CFAI says LADG is then equal to Da-kDl. Where k= L/A. So LADG= Da-(L/A)Dl

IMHO CFAI wants us to be able to calculate a banks LADG and determine what type of interest rate risk they are exposed to and whether their NW is improved or worsened by either an increase or decrease in interest rates. If the gap is positive, the Duration of Assets is higher. (I think of this as "Assets are larger in duration so they will fall more than liabilities" for an increase in interest rates. So your Assets (what you own) falls in value more than your Liabilities (what you owe). The net effect is a decrease in NW.