DEFINITION of 'Zero-Gap Condition'

When a financial institution's interest rate-sensitive assets and liabilities are in perfect balance for a given maturity. The condition derives its name from the fact that the duration gap - or the difference in the sensitivity of an institution's assets and liabilities to changes in interest rates - is zero.

BREAKING DOWN 'Zero-Gap Condition'

Financial institutions are exposed to interest rate risk when the interest sensitivity of their assets differs from the interest sensitivity of their liabilities. A zero-gap condition immunizes an institution from interest rate risk by ensuring that a change in interest rates will not affect the overall value of the firm's net worth.

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