Question

what are the fundamental similarity and differences between gap and dgap?

Answer 1

GAP or Funding GAP: GAP focuses on managing Interest income in the short term. To manage GAP one has to put assets and liabilities in maturity buckets and then decide the value of each rate sensitive asset and liabilities in each bucket. Funding GAP is simply the difference between the value of rate sensitive assets and value of rate sensitive liabilities.

DGAP or Duration GAP: Duration GAP is the difference between the average duration of assets and average duration of liabilities. A bank can have positive duration as well as negative duration.

The fundamental similarity between the GAP and DGAP (Duration GAP) analysis is that they are both measure of Interest rate risk and they both Impcat the assets and liability of an Institution. They are both concerned with the maturity structure of assets and liability.

The difference between the GAP and DGAP is that GAP or Funding gap perspective is more from an income perspective. Its focus is more on managing Interest rate income in the short term while DGAP or Duration gap perspective is from the overall balance sheet view. It measures the Interest rate risk for the long term matching of assets and liability.