Zero-Gap Condition

For a financial Company, a zero-gap condition exists when the interest rate-sensitive assets and liabilities are in perfect balance for a given maturity.

That is, the duration gap or the difference in the sensitivity of a Company’s assets and liability to changes in interest rates is exactly zero. A Firm tries to keep things in the zero-gap condition, otherwise their worth would be unstable, which makes them look untrustworthy.

Under this condition, a change in interest rates will not create any gain or loss for the company, since the firm is immunized to its interest rate risk, for a given maturity. Maturity is the date on which the life of a transaction or financial instrument end, after which it must either be renewed or ended.

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