Asset-Liability Management Workshop



Sotiris currently serves as associate professor of finance at Cass Business School, City University, London. His major research interests are risk analysis and management of financial institutions, asset pricing and financial modelling.

He has worked as a research advisor at London Clearing House and has delivered training courses for other institutions. He is the Director of the Undergraduate programmes, and he also served as Director of various masters’ programmes. He holds a Ph.D. degree in finance from Cass Business School.

His research has been covered by the media and has been published in various US and European journals.

About the program and ALM

The discipline of asset-liability management (ALM) has gone through enormous changes since the term was first coined in the late 1960s and early 1970s. From its origins as a cash flow matching technique, ALM has now instituted the use of advanced analytical techniques, quantitative finance tools as well as sophisticated pricing formulas and hedging strategies. The course brings the risk management of both sides of the balance sheet together in a unified framework.

The module focuses on the management of financial intermediaries, and aims to analyse financial risks, choose appropriate hedging strategies and monitor their implementation.

The prime objective of these lectures is to provide a) a thorough grounding in the way banks and insurance firms operate, b) the necessary theoretical knowledge and statistical tools to measure different kinds of risks, and c) a comprehensive examination of the techniques and instruments for managing those risks in the banking and insurance industry.

The lectures are highly participative and there will be practical case-studies in measuring and managing interest rate risk, FOREX exposure, market risk, as well as credit allocation and capital adequacy.

Participants who complete this training workshop will be given a certificate issued by the International Association of Financial Management’s professional body while being awarded a full status membership to the organization.

About the International Association of Financial Management

The International Association of Financial Management, a global organization provides financial training courses to professionals, institutions and corporations around the various locations it operates. Interfima presents programs in banking, insurance, capital markets, wealth management, risk management, project finance among others.

Interfima mission conforms to the progress of our members, the organizations’ prosperity we serve, and the development of the communities and the markets we operate.

Key aspects of the course

 Have a clear understanding of the ALM theory, which imposes distinctive managerial challenges in today’s fast changing financial markets
 Have a deep awareness of the vocational aspects of financial risk management along with the ALM strategies applied in banks and insurance firms
 Be able to address and tackle key issues such as: o Measuring and managing various risks in modern financial institutions
 Applying hedging strategies to enhance the intermediary’s risk-return profile o Identifying complex ALM issue within financial conglomerates and universal banks
 Be able to contribute to the shaping and implementation of an institution’s ALM policy

Who should attend?

 Treasury Directors and Managers
 Financial Institutions decision makers
 Market and Credit risk professionals
 Quantitative analysts
 Risk controllers
 Risk managers in investing and commercial banking
 Asset managers
 Insurers
 Financial consultants

Means of delivery The course will be a mixture of short lectures, case studies analysis, open discussion and real life exercises for the audience on both an individual and team/group basis. A maximum audience of thirty (30) delegates will be considered, enhancing interactivity between the audience and the course leader.


Program Outline

The module’s aims and the intended learning outcomes will be addresses in a series of lectures. The lectures will embody activities such as formal lectures, participative discussions, problem solving, and analysis of case studies or research papers with relevance to the course.

Topic 1
Overview of the asset-liability management and the risks of FI

Topic 2
GAP analysis and IR risk exposure

Topic 3
Interest rate risk, balance sheet immunization and hedging strategies

Topic 4
FOREX risk measurement and hedging strategies in ALM

Topic 5
Credit risk analysis and measurement

Topic 6
Loan portfolio management and concentration risk

Topic 7
Market risk and the use of VAR - CAR models

Topic 8
Asset - liability swaps, CQS and other hedging strategies in ALM

Topic 9
Capital adequacy and the insolvency risk of financial institutions

1. Overview of the asset-liability management and the risks of FI

The theory of ALM, The risk-return trade-off in ALM, The goal of ALM, The process of ALM, Developments in ALM, The spread of FI and the ALM, The main theories in ALM, The financial sector, Sources and uses of funds of FI, Introduction to the risks of FI (Interest rate risk, Trading risk, Credit risk, Off balance sheet risk, Technology/operational risk, FOREX risk, Country/sovereign risk, Liquidity risk), Interaction among risks, Other risks in the financial system, ALM: An introduction to IR risk, GAP analysis and management.

2. GAP analysis and IR risk exposure

Cases in monitoring the balance sheet (sensitivity analysis), Multi-period GAP and profitability analysis, Preparing and interpreting the GAP report, Active GAP management, Asset and liability restructuring, Managing a positive GAP, Empirical issues in GAP management, Factors affecting the GAP strategy, Managing a negative GAP, GAP analysis, IR changes and the NIM, Review of GAP analysis, The maturity model, Portfolio of A/L, The timing of cash flows, The duration model, Duration and IR elasticity, Duration and the value of equity, The adjusted for convexity model, The repricing model, RSA – RSL, A cumulative alternative, GTA ratio, Problems with the model, New empirical suggestions.

3. IR risk, balance sheet immunization and hedging strategies
Overview of derivatives instruments, Forward Vs Futures, Hedging IR risk using forward contracts, Hedging IR risk using futures, Macroheging, Microhedging, Selective hedging, Routine hedging, Adjustments for basis risk, Options and the balance sheet exposure, Hedging the duration GAP with options, Hedging instruments for borrowers, The use of caps, Hedging IR risk for lending FI, The use of floors, Hedging IR risk with synthetics, The use of collars, A numerical application of hedging strategies

4. FOREX risk measurement and hedging strategies in ALM
Fundamentals of FOREX risk, FX trading activities, FX trading and sources of FX risk, FX quotations, FOREX exposure, Measuring FOREX volatility, Implementing the DEAR approach, The BIS proposal, An A/L approach of FX risk, FX risk with A/L positions, FOREX GAP analysis, FOREX simulation analysis, Mismatched currency composition, On-balance-sheet hedging of FX risk, Off-balance-sheet hedging of FX risk, Multi-currency ALM, Currency futures, Spot-Futures perfect correlation, Basis risk, Currency options, Hedging FX sensitive assets, Hedging FX sensitive liabilities.

5. Credit risk analysis and techniques for loan portfolio management
Different kinds of loans, The fundamentals of credit risk analysis, Default risk models, Qualitative models, Idiosyncratic factors, Market factors, Credit scoring models, Linear probability model, Logit model, Probit model, Linear discriminant models, Term structure derivation of credit risk, Mortality rate derivation of credit risk, RAROC models, An option theory approach to the value of bank debt and equity, Option models of default risk, Merton’s model, KMV model, Loan portfolio risk, Simple approaches, MPT approach, Loan volume approach, Loan loss ratio, KMV portfolio manager model, Hedging credit risk, CQS, Credit forwards, Stock index futures, Put index options, Put option collateral, Credit spread call option, Digital default option, CAT insurance futures, CAT call spread, Credit securitisation, Double credit securitisation: The SBC case..

6. Market risk and the use of VAR - CAR models
Overview of market risk management, JPM’s RiskMetrics Model, Fixed income investment, FOREX trading, Equity investment, Portfolio effects, Regulatory models, The 1993-95 BIS proposal, Internal models for large banks, Fundamentals of VAR models, VAR and CAR in ALM, VAR Vs CAR, Loss distributions and VAR, Issues in measuring VAR, Intuition of CAR models, Case study: Barings and VAR, Volatility and period of observation, Summary of VAR and CAR methodology..

7. Asset - liability swaps, CQS and other hedging strategies in ALM
Fundamentals of swaps, Generic types of swaps, Other types of swaps, Interest rate swap, Optimal notional value for swaps, Hedge ratio, Pricing an IR swap, The no arbitrage conditions, Estimating the discount yield curve, Estimating implied forward rates, Credit risk implications, Credit risk and swaps, Quality swaps, Debt issuance swaps, Asset/liability swaps, Swap boundries and positive returns, An inverse floater swap, Advantages using swaps.

8. Capital adequacy and the solvency risk of financial institutions
The role of capital, The cost of equity capital, Capital and insolvency risk, Market values and insolvency risk, Credit and IR risk, Book values and insolvency risk, Credit and IR risk, The discrepancies between market and book values, Arguments against market value accounting, Issues in capital adequacy, Capital to asset ratio, RBC ratios, Calculating RBC ratios, Distinction of capital classes, Risk adjusted assets, Risk adjusted on balance sheet assets, Risk adjusted off balance sheet assets, Risk adjusted value of derivative instruments with netting, Criticism of RBC ratios, Capital requirements for other FI, Securities firms, Life insurance, P/C insurance.

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