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Market Guides > Gap reports - how do you use them?

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Published: 14th October 2009 by William Webster

Gap reports show you the interest rate risk you are running in your balance sheet. They put the assets and liabilities into time buckets in accordance with their interest rate repricing.

From this simple approach you can obtain a table or graph of the risk being run. This normally includes a profit and loss figure that results from moving the yield curve. Gap limits are also applied in order to keep the interest rate exposure within risk tolerence.

Gap reports aren't new; they are widely used and have both strengths and weaknesses. Let's find out more.

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Document Summary

What a gap report shows. Quantifying the risk. What happens if the yield curve moves? Hedging the risk. Match funding. Swaps. What hedging does to the gap. When to hedge. Limits on the gap. Strengths and weaknesses of the gap report. Options, pre-payments, changes to the shape of the yield curve, basis risk. Should you use gap reports?

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