A quick review of a number of Asset Liability Management (ALM) tools used by the banking and financial services industry in the world. The tools covered in this note include
Rate Sensitive Gap,
Earnings at Risk,
Cost to Close and
Market Value of Equity (MVE) Analysis
We look at Rate Sensitive Gap in a more detailed, process and calculation oriented [...]
Duration, Convexity and Asset Liability Management
Duration
Convexity
Approximate Price Change
Duration
Convexity
Where,
?i= change in yield (in decimals)
P0= Initial Price
P+= Price if yields increase by ?i
P-= Price if yields decline by ?i
Approximate Price Change
Total estimated percentage price change= -Duration×?i×100+Convexity×(?i)2×100
Forecasting the monetary policy
The next monetary policy announcement is due in the last week of May 2010. We attempt to forecast the cut in the policy discount rate by looking at oil prices, the relationship between oil prices and imports, exports, remittances, the current account balance, net foreign assets, credit to the private sector and [...]
