Overview

This eCourse consists of two modules. Module 1 looks at the ever-increasing problems faced by asset liability managers in managing the interest rate risk associated with banking portfolios. The module outlines the shortfalls of traditional analysis, and shows how the focus should be on the values of a balance sheet as a whole, rather than simply immediate earnings. A whole set of different tools are required to deal with the complexities and inherent options of a large balance sheet; use of the concepts of duration and convexity allow a deeper understanding of inherent risks. These risks can often be effectively managed through executing appropriate transactions in the derivatives markets.

The ALM function is about enhancing value, not merely preserving it. Module 2 addresses a particularly tricky form of market risk in the form of optionality, as well as examining ways in which the central role of the ALM function allows it to efficiently undertake tasks affecting the entire value of an institution. The module begins by examining the implications of optionality for a banking portfolio, and then addresses the firm-wide issues of FTP and the risk monitoring of a bank's value.

Objective

On completion of this course, you will be able to:
- Explain the difference between interest rate risk management, which targets the current level of earnings, and an approach that focuses on the market value of a bank's portfolio
- Explain the concepts of duration and convexity as they relate to interest rate risk, and the concept of duration gap
- Describe how the use of derivative transactions can help asset and liability managers to overcome typical portfolio problems
- Explain the implicit optionality existing in certain banking products, and how the values can be measured and managed
- Identify the objectives of funds transfer pricing (FTP) and the differing ways in which FTP can be manifested
- Explain how the risk monitoring and management of the ALM function ties into firm-wide measurements of profitability and risk

Content

Module 1: Asset & Liability Management (ALM) - Interest Rate Risk
Topic 1: Problems with Gap Analysis
Topic 2: Beyond Gap Analysis
Topic 3: Derivatives & Hedging

Module 2: Asset & Liability Management (ALM) - Options, FTP, & Firm Value
Topic 1: Options
Topic 2: Funds Transfer Pricing (FTP)
Topic 3: ALM & the Value of the Firm
Topic 2: Beyond Gap Analysis
- Market Value
- Economic Value of Equity (EVE)
- Duration
* Portfolio Duration
* Duration Gap
- Convexity

Topic 3: Derivatives & Hedging
- Forward Rates & Curves
- Creating Forward Rates
- FRAs, Swaps & Breakevens
- Basic Swaps