Calculate The Duration Gap

The fund has $900 million in assets, $1 billion in liabilities, liability duration of 14 years, and hedging assets with duration of 6 years. Hedging assets are $420 million of the portfolio. Estimate the direction and rough size of funded-status sensitivity to a 1 percent rate fall. ALM duration gap: compare liability rate sensitivity with asset hedge sensitivity before deciding whether rate risk is intentional. The common shortcut is to look only at the bond allocation and say the fund is conservative or aggressive. That misses the liability side, where most pension rate sensitivity often lives. Liability sensitivity $1,000M liabilities…

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