Zero-Gap Condition

Posted in Finance, Accounting and Economics Terms, Total Reads: 397

Definition: Zero-Gap Condition

Zero-gap condition is a situation in which the interest rate sensitive assets and liabilities of a financial institution are in perfect balance in case of a given maturity. Interest rate sensitive assets and liabilities are those assets or liabilities whose values changes with the change in the interest rates.

The name for such a condition is derived from the fact that any changes in the interest rates will balance the difference in the fluctuations in assets and liabilities thereby keeping the gap between them zero.

A lot of times due to the fluctuations in the interest rates financial institutions face the risk of emergence of a gap in the interest rate sensitivities between their assets and liabilities. To mitigate such interest rate risks the financial institutions need to ensure that the change in interest rates do not affect the overall value of the net worth of the firm. This immunization of the firm from interest rate risks by maintaining the difference in the sensitivity of the assets and liabilities of the firm is called Zero-Gap Condition.



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