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.