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solution

A bank’s overall “Gap” (as opposed to the monthly measure explained in class) calculates the difference between the (average) maturity of its assets and its liabilities. This is a measure of risk, because if, for example, a time deposit matures and the loan that was made with that deposit money does not mature yet, the bank must “rollover” (issue another deposit) at an interest rate that might be much higher (which compresses, and may even make negative, the interest margin.

Suppose the maturities are as follows: Loans 1 year, Bonds 2 years, Demand deposits 0, Time deposits 6 months Inter-Bank debt 3 months

Calculate the Gap by: ? multiplying each asset by its maturity and summing them ? multiplying each liability by its maturity and summing ? subtracting the latter from the former ? dividing by total assets

Solution:

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