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composition of assets and liabilities including off balance sheet items of the bank conducting the risk assessment. Asset Liability Management is concerned with strategic balance sheet management involving risks caused by changes in interest rates, exchange rate, credit risk and the liquidity position of bank. With profit becoming a key-factor. ALM is required to match assets & liabilities and minimize liquidity as well as market risk.
ALM is concerned with strategic management of Balance Sheet by giving due weightage to market risks viz. Liquidity Risk, Interest Rate Risk & Currency Risk. ALM function involves planning, directing, controlling the flow, level, mix, cost and yield of funds of the bank ALM builds up Assets and Liabilities of the bank based on the concept of Net Interest Income (NII) or Net Interest Margin (NIM).
the foreign exchange risk and liquidity risk that might arise.
LIQUIDITY MANAGEMENT
withdrawal and to fund loan demands. The variability of loan demands and variability of deposits determine banks liquidity needs.It represents the ability to accommodate decreases in liability and to fund increases in assets. It demonstrates the market place that the bank is safe and therefore capable of repaying its borrowings.
Conti....
It enables bank to meet its prior loan commitments, whether formal or informal. It enables bank to avoid the unprofitable sale of assets. It lowers the size of the default risk premium the bank must pay for funds.
income(NII) or in variations in net interest margin(NIM). Gap: The gap is the difference between the amount of assets and liabilities on which the interest rates are reset during a given period. Basis risk: The risk that the interest rate of different assets and liabilities may change in different magnitudes is called basis risk. Embedded option: Prepayment of loans and bonds and/or premature withdrawal of deposits before their stated maturity dates.
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Price Risk
When Interest Rates Rise, the Market Value
Reinvestment Risk
When Interest Rates Fall, the Coupon Payments on the Bond are Reinvested at Lower Rates
adverse exchange rate movements during a period in which it has open position in an individual foreign currency. Transaction exposure- Change in the foreign exchange rate between the time the transaction is executed and the time it is settled. Forwards- Agreement to buy or sell for a predetermined amount, at a predetermined rate on a predetermined date.
Conti....
Open position:
The extent to which outstanding contracts to purchase a currency exceed liabilities plus outstanding contracts to sell the currency & vice versa. position- A limit on the maximum open position left overnight, in all major currencies.
position in all major currencies at any point of time during day. Such limits are generally larger than overnight positions.
Overnight Day-light
Outcomes-
ALM is decreasing the market risk, operational risk, credit risk and other risk which are affected the Banking System.
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