Liquidity implies a positive cash flow.
The difference between sources and uses of funds in specific time band is known as Liquidity Gap which may be positive or negative.
The Duration and Simulation methods are used to make ALM more effective.
Derivatives are useful in reducing the Liquidity & Interest rate Risk. They replicate market movements. They can be used to hedge high value individual transactions.
Treasury products such as Bonds & Commercial papers are subject to credit risk.
Transfer pricing refers to fixing the cost of resources and return on Assets of the bank in a rational manner. Treasury is also responsible for transfer pricing.
Modern banking may be defined as Risk Intermediation.
Market Risk comprises of Liquidity and interest rate risk.
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ALM is the management of the Net Interest Margin (NIM) to ensure that its level and riskiness are compatible with risk/return objectives of the bank.
The strategy of actively managing the composition and mix of assets and liabilities portfolios is called balance sheet restructuring.
The impact of volatility on the short-term profit is measured by Net Interest Income. Net Interest Income = Interest Income - Interest Expenses.
Net Interest Margin (NIM) = Net Interest Income/Average total Assets.
Profit = Interest Income - Interest expense - provision for loan loss + non-interest revenue - non-interest expense – taxes
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