Asset and Liability Management

IFF Training

How long?

  • 3 days
  • online, in person

IFF Training

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About the course

Attending this comprehensive course will result in increased profitability and shareholder value. In addition, it fulfills the ever-increasing need to comply with complex regulatory and audit requirements, such as the latest requirements for managing IRRBB.

Learning Objectives:

  • The measurement and control of ALM risks and opportunities
  • Identification of the key asset and liability risk management issues;
  • Identification of key financial control issues
  • Learn how to assess the strengths and weaknesses of ALM policies and procedures
  • Examine the key issues facing ALCOs
  • Explore the strengths and weaknesses of using static gaps
  • How to use duration gaps effectively
  • Understand the economic value of equity
  • Learn to hedge risks with derivatives
  • Risk management techniques
  • Defining the reports required by ALCO
  • Interpreting the reports required by ALCO

How You Will Learn

This case study and simulation driven course emphasises the practical applications of asset and liability management in the highly regulated environment in which banks must operate post Basel III. The extensive use of case studies, exercises and hedging simulations requires participants to work in groups and to use laptops loaded with Excel. There are simulations examining net interest income, duration gaps, the management of the economic value of equity as well as interest rate and currency risk management techniques.

Agenda Summary

An Introduction to Asset and Liability Management

  • Recent trends in ALM
  • Yield curve analysis
  • Gap analysis
  • Net interest income
  • Duration gaps
  • Economic value of equity
  • Value at risk
  • Setting and monitoring tolerance limits
  • Optimising income and managing risk
  • Typical practices in funds transfer pricing
  • Managing liquidity risk
  • Likely developments in ALM

Case Study: McKinsey

Case Study: HSBC - ALM Gaps

Case Study: Goldman Sachs - ALM

Contract Specifications

  • Underlying instruments
  • Price quotes
  • Contract months
  • Tick sizes
  • Settlement procedures
  • Position limits
  • Block minimums
  • All or none minimums
  • Rulebook chapters
  • Trading hours

Case Study: Contract Specifications

Hedging an Equity Portfolio

  • Identifying, measuring and managing the underlying exposures
  • Long and short positions
  • Creating a hedge
  • Alternative hedges
  • Settlement
  • Advantages of the swap market over the cash market
  • Advantages of futures over swaps
  • OTC and exchange traded derivatives

Case Study: Hedging an Equity Portfolio

The Regulatory Environment

  • Background: Basel I & Basel II
  • Basel III
    • liquidity
    • capital
    • leverage
    • systemic risk
  • Basel IV

The Rules of Risk Management

  • Return and risk
  • Transparency
  • Experience
  • Known unknowns and unknown unknowns
  • Communication
  • Diversification
  • Discipline
  • Fraud, mismanagement, greed and corruption
  • Common sense

Case study: Bank Bosses Must Ensure Honesty is Best Policy

The Laws of Investing

  • Margins of safety
  • This time is different
  • Patience
  • Contrarian views
  • Risk and the permanent loss of capital
  • Leverage
  • Knowledge

Case Study: The Laws of Investing

Swap Driven Bond Issues

  • Motives for borrowers
  • Motives for arrangers
  • Motives for investors
  • The advantages of par/par structures

Discussion: Discount Rates

FRA Hedging

  • Dynamics of the forward market
  • Upside and downside risks
  • Basis point values
  • Settlement
  • Tick values
  • Futures equivalents

Case Study: FRA Hedging

Case Study: JP Morgan Swaps

  • Intraday trading
  • Directional risks
  • Taking a view
  • Realising gains and losses
  • Marking to market
  • Sensitivity

FRAs, Futures and Interest Rate Swaps

  • Buying and selling FRAs
  • Selling and buying futures
  • Paying and receiving fixed rates in the swap markets
  • Perfect hedges and basis risk
  • Contrasting exchange traded and OTC derivatives

Case Study: FRAs, Futures and Interest Rate Swaps

Case Study: How Hedging Works

  • Measuring interest rate risk
  • Duration weighted hedging
  • Balancing the hedge
  • Hedge ratios
  • Testing the hedge

Asset & Liability Management - Key Themes

  • Role of the senior ALM committee
  • Composition and authority of the senior ALM committee
  • The forward-looking nature of, and decisions made by, the senior ALM committee
  • The degree of challenge observed at the senior ALM committee

Exercise and Discussion: Key Themes in Asset & Liability Management

Asset & Liability Management - Key Issues for ALCOs

  • Key issues an ALCO should cover
  • How ‘good firms’ analyse interest rate risk
  • Areas in which interest rate risk management at firms is weakest
  • How ALCOs test liquidity risk

Exercise and Discussion: Key Issues in Asset & Liability Management

Case Study: OCBC & UOB - ALM

Asset & Liability Management - Key Observations for ALCOs

  • Key liquidity and funding metrics
  • Understanding the EVE and NII results
  • Role of economic forecasts
  • Business lines and control function s and strategy
  • Compliance with limits and planned future actions
  • Accepting recommendations without debate or challenge
  • Managing the agenda

Case Study: Asset & Liability Management - Key Observations for ALCOs

Reviewing the Effectiveness of the Senior ALM Committee

  • Current positions, limits and forecasts
  • Liquidity and funding risks
  • Covering IRRBB
  • Forecast indicators and risk appetite
  • Product pricing and mix
  • Under utilisation of limits
  • Contradictions between EVE and NII
  • Are high impact scenarios sufficiently remote?

Case Study: Reviewing the Effectiveness of the Senior ALM Committee

The Rules of Risk Management

  • Return and risk
  • Transparency
  • Experience
  • Known unknowns and unknown unknowns
  • Communication
  • Diversification
  • Discipline
  • Fraud, mismanagement, greed and corruption
  • Common sense

Case Study: The Rules of Risk Management

Managing Interest Rate Risk - 1

  • Time value of money
  • Future value and present value
  • Implied repo rates
  • Discount factors and compound factors
  • Simple interest and compound interest
  • Yield and return
  • Act/act, act/360 and 30/360
  • Interpreting the yield curve
  • A guide to money market products
  • Duration, PV01s and DV01s

Case Study: Using Duration as a Hedging and an ALM Risk Management Tool

Managing Interest Rate Risk - 2

  • The mechanism of FRAs
  • Calculating FRA rates
  • Hedging and trading with FRAs
  • Calculating the settlement amount
  • FRAs and FX swaps
  • Pricing forwards from FRAs
  • FRAs and futures

Managing Interest Rate Risk in the Banking Book

Case Study: Contrasting the use of FRAs and Futures in Asset & Liability Management

EVE and Hedging

  • Relating EVE to earnings
  • EVE and estimated actual reported earnings
  • What does EVE really reveal about future earnings
  • Managing EVE
  • Using EVE to alter future earnings
  • Managing EVE when portfolios are not marketable
  • Causes of sensitivity in EVE
  • Hedging the risk in the sensitivity to EVE

Exercise: EVE and Hedging

Simulation: Asset and Liability Management - EVE and Interest Rate Sensitivity

  • Liquidity Coverage Ratios
  • LCR calculation
  • Stock of high quality liquid assets/buffer
    • levels one assets
    • level two assets
  • Operational requirements
  • Calculation of net cash outflows

Case Study: HSBC Liquidity Risk

Case Study: Challenges of Liquidity Risk Management and the LCR

Simulation: Hedging Duration Gaps

  • The economic value of equity
  • Positive and negative gaps
  • Estimating changes in the economic value of equity
  • Durations of assets and liabilities
  • Leverage adjusted duration gaps
  • Hedging with forward contracts
  • Hedging withe futures contracts
  • Hedging with swaps
  • Stress testing hedges
  • EVE and duration gaps

Hedging Pitfalls

  • Status quo
  • Taking a view
  • Engaging with business partners
  • Attitude to losses
  • Balance sheet forecasting
  • Volatility and liquidity management
  • Spreadsheets
  • The costs of FX trading
  • ISDA and counterparty risk management
  • Timing of FX results

Case Study: HSBC - Market Risk

Simulation: Interest Rate Hedging and Market-Making

  • ALM hedging and market making simulation
  • ALCO meeting
  • Hedging, trading and market making session
  • Protecting the bank’s earnings
  • Defining a strategy
  • Managing interest rate risk
  • Calculating the impact on net interest income

Case Study: ALM Lehman Brothers

  • Weaknesses in checks and balances
  • Valukas Report
  • Vulnerability to collapse
  • Shadow banking systems
  • Fundamental regulatory failure
  • Flight risk
  • Derivative exposures and market turmoil
  • Significant exposures
  • Risk limits
  • Other contributory factors
  • Key lessons

Contingency Funding Plans

  • Liquidity crisis management
  • Response plans and scenario planning
  • Liquidity profiles
  • Roles, responsibilities and action plans
  • Contingency funding plans in action
  • The qualitative components of a complete CFP
  • Quantitative analysis and support
  • Updating and maintaining a CFP The value of a CFP

Case Study: McKinsey - Anatomy of a Liquidity Crisis

Case Study: Multi-Currency Asset & Liability Management

  • Identifying the exposure
  • Cash market alternatives
  • Forward outrights, FX swaps and currency swaps

Case Study: HSBC - Net Interest Income

Experts

Alan McDougall

Alan helps banks and their clients to manage risk. He has designed and delivered over 1600 highly interactive training days in more than 40 countries for the International Faculty of Finance, Goldman Sachs, Morgan Stanley, JP Morgan, HSBC, Deutsche Bank, Rabobank, BNP Paribas, Societe Generale, U...

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Asset and Liability Management at IFF Training

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