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MANAGING INTEREST RATE RISK: DURATION GAP AND MARKET VALUE OF EQUITY - page 16 / 39

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Focus on the market value of equity (MVE)

We know that: MVE = MVA – MVL

With

Ai = – DAi [ y / (1+y) ] Ai and

Lj = – DLj [ y / (1+y) ] Lj

Hence:

MVE = –[DA – (MVL / MVA) DL] [y / (1+y)] MVA

If we define a bank’s duration gap: (DGAP) = DA – (MVL / MVA) DL, then

MVE = – DGAP [ y / (1+y) ] MVA

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