I feel like I am missing something with this concept. Does somebody mind walking me through it? LADG= Duration of assets - (L/A)* Duration of liabilities
There is usually a mismatch between the duration of assets and the duration of liabilities. That means that the risk sensitivity is quite large and the LADG is the measure of it. In fact it is a simple calc. You take the duration of your assets and deduct the adjusted duration of your liabilities. The result is the gap between the two.
It will make sense if we put it in numbers" Asset: 100 D:5 Liability: 80 D:6 LADG = 5 - .8*6 = 0.2
It just hit me when I saw phBooms example. This has to be the most basic thing on the whole exam. I feel so dumb. : )
feeling dumb isn’t a problem… as long as you aren’t. (makes me think of Southpark’s Mr. Garrison: "there are no stupid questions… just stupid people)