The term is typically used by banks, pension funds, or other financial institutions to measure, and manage, their risk due to changes in the interest rate: by duration matching, that is creating a "zero duration gap", the firm becomes immunized against interest rate risk.
As outlined, a key objective of ALM is to measure and then manage the direction and extent of any asset-liability mismatch - i.e. a funding or "maturity gap" - so as to maintain adequate profitability.
[2][1] This exercise will have the joint objectives of balancing maturities, cash-flows and / or interest rates, for a particular time horizon.
Further limitations of the duration gap approach to risk-management include the following: The outlined "static" approach considers any future gaps due to current, i.e. existing, exposures, and any related exercise of (embedded) options - usually prepayments - at different points in time.
"Dynamic gap analysis" enlarges the scope by including "what if" scenarios, testing potential changes in business activity (new volumes, additional prepayment transactions, potential hedging transactions), and considering unusual interest rate scenarios, with their associated shape of the yield curve and resultant changes in pricing.
Depending on deal-stage and likelihood, analysts will incorporate expected capital investments and their required funding under either approach, as appropriate.