ALM Information System

 A management philosophy that outlines the risk policies and tolerance levels must be used to support ALM. The essential component of the entire ALM activity is the availability of sufficient and reliable information with promptness, so this framework needs to be constructed on a strong methodology with the necessary supporting information system. Information is therefore essential to the ALM process. There are numerous techniques that are widely used to measure hazards. These might be as basic as a gap statement or as complex and data-intensive as risk adjusted profitability measurement techniques. For the purpose of producing reports on the liquidity gap and interest rate gap, the current guidelines would call for a somewhat simpler information structure.

Guidelines of Asset Liability Management (ALM)

 Due  to  the  asset-liability transition,  FIs  are  typically subject to  credit and  market  risks.  The risks, particularly the market risks, associated with the operations of FIs have grown to be complex and significant as a result of the recent liberalization of the financial markets and the increasing integration of domestic markets with external markets. This  requires strategic management. FIs  must dynamically decide interest rates on a variety of products in their portfolios of obligations and assets, in both domestic and international currencies, as they operate in a relatively unregulated environment. The management of FIs is under pressure to maintain a healthy balance between spreads, profitability, and long-term survival due to intense rivalry for business involving both assets and liabilities and rising domestic interest rate and foreign exchange rate volatility. These demands necessitate institutionalizing an integrated risk management strategy through systematic and comprehensive methods rather than sporadic activity.

The fact that the FIs are subject to a number of significant risks during the course of their operations— generally categorized as credit risk, market risk, and operational risk—underscores the importance of having efficient risk management systems in FIs.

 

By improving the standard of their risk management and implementing more extensive ALM practices than they have in the past, the FIs must address these risks in a structured way. By measuring, monitoring, and managing a FI's liquidity, exchange rate, and interest rate risks—risks that must be tightly linked with the FIs' business strategy—the proposed ALM system aims to establish a structured framework for managing  market  risks.  This  note  lays  forth  general  guidelines  for  FIs  with  regard  to  systems  for managing interest rate, exchange rate, and liquidity risks, all of which are a component of the ALM role. The  market  risk  management  discipline,  or  managing  business  after  considering  the  market  risks involved, would be the initial emphasis of the ALM department. A solid risk management system should aim to develop into a tactical device for efficient management of FIs.

 

The ALM process rests on three pillars:

 

• ALM Information System

 

Ø   Management Information System

Ø   Information availability, accuracy, adequacy and expediency

 

• ALM Organisation

 

Ø   Structure and responsibilities

Ø   Level of top management involvement

 

• ALM Process

 

Ø   Risk parameters

Ø   Risk identification

Ø   Risk measurement

Ø   Risk management

Ø   Risk policies and tolerance levels

Different between Forward Contract and Futures Contract

 Here are the nine differences between Forward Contract and Futures Contract in the FOREX market:

	Forward Contract	Futures Contract
1	Customized agreement between two parties	Standardized contract traded on an exchange
2	Negotiated terms include specific currencies, amounts and maturity dates	Terms are predetermined and uniform for all contracts
3	Traded over the counter (OTC) between two parties	Traded on a centralized exchange with multiple participants.
4	Not as liquid as futures contracts	Highly liquid with active trading and price transparency
5	Settlement occurs at the end of the contract period	Daily settlement through gains or losses is common
6	Parties bear counterparty risk (credit risk) of default	Minimal counterparty risk due to exchange acting as the counterparty for all transactions.
7	Can be customized to suit specific hedging needs.	Standardized terms may not perfectly align with individual hedging requirements.
8	May require a deposit or margin to secure the contract	Requires daily margin payments to maintain the position
9	Commonly used by corporations for hedging purposes	Attracts a wide range of participants, including speculators and arbitrageurs.

 

These differences highlight the contrasting features and applications of forward contracts and futures contracts in the FOREX market. Forward contracts offer customization and flexibility but involve counterparty risk, while futures contracts provide standardized terms, higher liquidity and lower counterparty risk.