Explanation:
Statement A is false. The duration gap is calculated as (Duration of Assets) - (Total Liabilities / Total Assets) × (Duration of Liabilities). Even if a bank is solvent (Total Assets > Total Liabilities), its duration gap can be negative if the duration of its liabilities is significantly greater than the duration of its assets. Therefore, a solvent bank does not by definition have a positive duration gap. Statements B, C, and D are true.
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A
A solvent bank (i.e., total assets exceed total liabilities) by definition must have a positive duration gap
B
A limitation of duration gap management is that it is often difficult to find assets and liabilities of the same duration to fit into the bank’s portfolio
C
A disadvantage of interest-sensitive gap management is that it analyzes the impact of interest rate changes on the bank’s net income, but neglects impacts on the market value of the bank’s equity capital position
D
According to duration gap analysis, the bank is fully hedged when the dollar-weighted duration of its assets portfolio equals the dollar-weighted duration of its liability portfolio; aka, zero duration gap position
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