Asset Liability Management (ALM) Crash Course – Topic Guide

Asset Liability Management (ALM) involves taking decisions and actions regarding assets and liabilities in an integrated manner in order to manage the business of the entity and meet the organization’s financial objectives.

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It is a continuing process that involves formulating, implementing, monitoring and revising strategies related to its assets and liabilities keeping in mind the entity’s risk tolerances and constraints.

The Asset Liability Management (ALM) Crash course starts off with basic and core concepts and quickly delves into core ALM tools.

 

Topics covered:

    1. Definitions of the primary risks that the ALM tools address namely interest rate mismatch risk and liquidity risk
    2. Pre-requisite topics used as foundation for measures mentioned later in the course:
      • Duration and Convexity
      • Value at Risk (VaR)
    3. Step by Step  methodologies for ALM tools, in particular:
      • Market Value of Equity (MVE)
      • Earnings at Risk (EAR)
      • Cost to Close – interest rate risk measure
      • Cost to Close – liquidity risk measure
      • Rate sensitive gap
      • Price sensitive gap
      • Liquidity gap
      • Net interest income at risk
      • Duration gap analysis
    4. A review of certain real-world applications of ALM including:
      • A simple bank example involving duration matching and immunization
      • A Pension fund example involving dedication or Cash flow matching
    5. Other Liquidity Risk Measurement tools such as liquidity ratios (e.g. Debt-to-Equity ratios) and analytical statistics (e.g. unused lines of credit)
    6. An overview of a liquidity management framework including:
      • Setting up liquidity limits (e.g. cash flow mismatch limits, concentration limits)
      • Contingency Funding planning to identify and develop funding sources, assign responsibilities for various liquidity need and stress environments and predefine triggers to warn against a potential stress situation for initiation of necessary timely action
      • Liquidity enhancement tactics both for a systemic crisis as well as for a company-specific crisis
    7. Adjusting market risk VaR estimates for market liquidity risk

 

EXCEL files

The Asset Liability Management (ALM) pre-packaged crash course also includes 6 EXCEL files that present fully worked procedures for the following concepts:

    1. Market Value of Equity
    2. Earnings at Risk
    3. Cost to Close – Interest Rate Risk perspective
    4. Cost to Close – Liquidity Risk perspective

Also included in the package deal is an excel example for the Duration and Convexity pre-requisite topic and Value at Risk with Liquidity Premium.

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