The main objective of Asset Liability Management (ALM) is to effectively hold asset and liability portfolios along the time axis and optimize the RORAC (Return/Risk), using various evaluation and strategy approaches. Due to the complexity of sophisticated mathematical models, effective finance management implies the application of software tools and systems. Our solution accomplishes the following:
The calculation structure indicates the separate management of the asset and liability side, so that interest rates, opportunity rates, conditional margins and corresponding contributions are calculated in two dimensions:
Calculation of FTP results, i.e. structural margins and contributions for assets, liabilities as well as the differences between them, is performed in the next step, where the split between assets and liabilities is based on unit interest rates, e.g. on three-month Libor, or some Overnight Treasury rate.
Asset and liability modules use input data from external and internal databases, user inputs, downloaded market data and internal calculation results for financial instruments. Input data and results are stored into the database for subsequent reporting. The general scheme of the data flow in ALM follows the main steps of data preparation and processing:
|Fixed||Credits with fixed interest rate||Credit with an amortization option|
|Floating||Credits with floating interest rate||Floating certificate of deposit|
|Stochastic||Deposits with future interest rate agreements||
ALM deals with interest rate and capital cash flows and pay-offs in future periods. Depending on the interest rate type, fixed and float cash flows can be considered. A stochastic component is included in case of options, representing expected cash flows and distributions.
All modules, including ALM, provide means to manage the market environment, e.g.:
ALM analysis can be performed under scenario and stress test conditions. Market scenarios define supposed changes in market variables, such as interest rates, exchange rates, prices and indexes of market environment.
Liquidity scenarios include the definition of future developments, reinvestments or refinancing strategies that represent expectations of future changes in cash flows, prolongation of instruments and payments, increases/decreases of business volume, expected and unexpected losses at debtor bankrupts, etc. Liquidity scenarios can also depict budgets and financing plans. In the analysis, one can see the gap between the portfolio’s future without scenarios and the expectations of its future behavior. This is represented via planned synthetic positions at assumed future market conditions. Original portfolios are calculated together with synthetic positions. The results are then used to make decisions at the present point about their future behavior.
Every ALM scenario can combine market and liquidity scenarios.
ALM analysis provides means to present future cash flow dispositions and detects any gaps or investment efficiencies in the presence of different market scenarios. Different future behavioral changes (growth, defaults of large customers, deposits increase, etc.) may be activated in cash flow scenarios in order to optimize the asset and liability management.
|Supporting Modules:||Definition of opportunity rates, interest rate expressions, market and liquidity scenarios, analysis by periods and time schemes, static and dynamic portfolio structures and sub-portfolios|
The ALM module is highly extendable due to a simple method of adding new rule-based model scripts or extending already existing ones. The implementation of modules is based on a well-known artificial intelligence tool - the expert system shell with inference engine. Scripts are apllied to model the Windows GUI, using model variables that define the business logic, expressed in rules. Models are interpreted by the expert system, and the inference engine runs rules on model variables. Model changes are performed online, which means that changes are activated immediately after editing and reloading the model.The following additional modules and extensions are included:
The ALM Module inherits the features of Risk Framework Interfaces and Connectors, including: