• A zero-gap condition exists when the interest-sensitive assets and liabilities of a financial institution are in perfect balance for a given maturity.

  • Large banks must protect their current net worth, and pension funds are required to make payments in a few years, so they must protect the future value of their portfolios and also take into account the uncertainty of future interest rates.
  • In the zero-gap scenario, the duration gap—or the difference in the sensitivity of an institution’s assets and liabilities to changes in interest rates—is exactly zero.
  • Under this condition, the change in interest rates will not create any surplus or deficit for the company, since the company is protected from interest rate risk for a given maturity.