Chapter 18 Flashcards
Asset liability modeling
Objectives
Reference
Risk
Variation
Project
The key factors in managing credit risk are
The creditworthiness of the counterparties with which the institution deals with
The total exposure to each counterparty
Creditworthiness
Limits
Credit ratings
Length of exposure
Dealing
Recognized
Central clearing house
Credit Exposure
It is important to monitor and place limits on the credit exposure to any single counterparty
Market risk
The risk relating to changes in the value of the portfolio due to movements in the market value of assets held
Credit risk
The risk that a counterparty of an organization will be unwilling or unable to fulfil their obligations
Operational risk
The risk of loss due to fraud or mismanagement within the fund management organisation itself
Liquidity risk
The risk of not having sufficient cash to meet operational needs at all times. It is related to market risk as the liquidity of the portfolio needs to be taken into account in portfolio selection
Relative performance risk
The risk of underperforming comparable institutional investors
How to manage liquidity risk?
Gap analysis
Duration analysis
Gap analysis
“balance sheet”
Policies
Categories
Net liquid assets
The liquidity gap or net liquid assets is defined as: the difference between the level of liquid assets and volatile liabilities
Duration analysis
Liquidity duration or liquidity risk elasticity (LRE) considers the impact of changes in market conditions
Load difference
Specifies the range over which the percentage allocation to a specific class can vary
Load ratio
A load ratio specifies the maximum variation of the allocation to a specific class of asset as a percentage of the benchmark allocation to that class. This has the effect that a constant load ratio has a smaller absolute variation for lower-weighted classes.
