Someone explain the reason behind If Interest rates go UP and LADG < 0 Then Market Value of Equity goes up. I expect your answer to be prompt and correct. MGG
And I thought we were all friends… pffffffff
Liability Adjusted Duration Gap
does this stem from somehwere. i was under the impression that LADG = Da - (L/A)Dl so if LADG > 0 that implies a positive duration gap and rates increase, then market value of equity decreases. which makes intuitive sense as longer duration is more sensitive to rate changes and therefore will lose more value than short durations. in this case, the assets will lose more value than the liabilities, shrinking the value of equity. **** just verified in Schweser page 26 book 2.
CRAP => LADG - add that to the never endling list of things I dont know and/or dont even remember reading about in the CFAI text…
In Schweser Book 2
where at in CFAI text… I dont have their stuff - just Secret Sauce… I dont see it in the CFAI Index or Glossary Thats what stinks - I think Schweser and Stalla make up their own names for schiznit
try looking at managing institutional portfolio’s for commercial banks or banks. check ‘commercial banks’ in the CFAI glossary or banks…it is likely a subheading under there.
Got it… thx! v2 p359 ‘Leverage’-Adjusted Duration Gap = D(A) - kD(L) where k=L/A
A postive interest rate mopvement (up) will cause the MV of the Banks Net Worth to go down since the Duration of the Assets > Duration of the Liabilities (assets will decline greater than Liabilities), right?
correct. see my post above as well for a further explanation.
Striker - just saw your response - and mine and yours jives with MGGs.
strikershank Wrote: ------------------------------------------------------- > does this stem from somehwere. > > i was under the impression that > > LADG = Da - (L/A)Dl > > so if LADG > 0 that implies a positive duration > gap and rates increase, then market value of > equity decreases. which makes intuitive sense as > longer duration is more sensitive to rate changes > and therefore will lose more value than short > durations. in this case, the assets will lose more > value than the liabilities, shrinking the value of > equity. > > **** > > just verified in Schweser page 26 book 2. That’s the same logic I use in looking at this problem…pretty intuitive.
i’m sacrificing that section. i recall seeing it but can’t remember it 5 minutes after.
The easiest way to remember LADG is to keep in mind if it’s positive, then your equity would have, a net positive duration, that is your asset duration is greater then your liability duration and an increase in interest rates will cause a net fall in equity… it’s an intuitive concept. Typically banks will have a net positive LADG as loans (assets) are longer term and liabilities are short term. We are not required to know how to calculate it. I would suggest remember how to interpret it.