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MANAGING INTEREST RATE RISK: DURATION GAP AND MARKET VALUE OF EQUITY - page 14 / 39

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There are four steps in duration gap analysis.

1.

Management develops an interest rate forecast.

2.

Management estimates the market value of bank assets, liabilities and stockholders’ equity.

3.

Management estimates the weighted duration of assets and weighted duration of liabilities.

The effects of both on- and off-balance sheet items are incorporated. These estimates are used to calculate duration gap.

4.

Management forecasts changes in the market value of stockholders’ equity across different interest rate environments.

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