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MANAGING INTEREST RATE RISK: DURATION GAP AND MARKET VALUE OF EQUITY - page 15 / 39

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Duration GAP at the bank

The bank can protect either the market value of equity (MVE) or the book value of NII, but not both.

To protect the MVE the bank would set DGAP to zero:

DGAP = DA - u x DL

where   DA = weighted average duration of assets DL = weighted average duration of liabs

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