Duration is a measure of how rapidly the prices of interest sensitive securities change as the rate of interest changes (see application example in the ALM section). For example, if the duration of a security works out to 2 this means that for a 1% increase in interest rates the price of the instrument will decrease by 2%. Similarly, if the interest rates were to decrease by 1% the price of the security would increase by 2%.
This section reviews the following Asset Liability Management (ALM) tools Price Sensitive Gap Liability Gap Net Interest Income (NII) at Risk Duration Gap Analysis Please see our new self study, self paced video based course on setting limits that walk through the process of
Introduction Asset Liability Management (ALM) involves taking decisions and actions regarding assets and liabilities in an integrated manner in order to manage the business of the entity and meet the organization’s financial objectives. It is a continuing process that involves formulating, implementing, monitoring and revising
ALM reports – a short review A quick review of a number of Asset Liability Management (ALM) reports 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
Duration Convexity and Asset Liability Management What is the relationship between Duration, Convexity and Asset Liability management. Let’s take a quick look Duration Duration is defined as interest rate sensitivity. For the purpose of this post modified duration is calculated by estimating the price change per
Convexity Duration approximates the change in price of an instrument due to changes in the yield. However this approximation tends to work only for small changes in yield. For larger changes there will be a significant error term between the actual price change and that