Derivatives are essential instruments in Asset-Liability Management (ALM), offering financial institutions sophisticated tools to manage and mitigate key risks—particularly interest rate risk and currency risk. By employing derivatives, banks and financial institutions can hedge balance sheet exposures, manage cash flows effectively, and address mismatches in the timing and structure of assets and liabilities. 1. Managing…
Asset-Liability Management (ALM) is a critical risk management framework used by banks to maintain a balanced and stable relationship between their assets—such as loans and investments—and liabilities, which include deposits and borrowings. The primary objective of ALM is to ensure sustained profitability, financial stability, and regulatory compliance through the prudent management of liquidity, interest rate,…
Liquidity risk and interest rate risk are two critical forms of financial risk that financial institutions, particularly banks, must manage to ensure operational continuity and financial stability. Although distinct in nature, these risks are often interconnected, requiring an integrated risk management approach. Liquidity Risk DefinitionLiquidity risk refers to the potential inability of an institution to…
Asset-Liability Management (ALM) is a comprehensive financial strategy employed by banks, financial institutions, and large corporations to manage the risks arising from mismatches between their assets and liabilities. The core objective of ALM is to ensure that an institution can meet its financial obligations as they fall due while optimizing profitability and maintaining long-term financial…
Treasury and Asset-Liability Management (ALM) are critical functions within financial institutions, each playing a distinct role in maintaining financial stability and effective risk management. While Treasury focuses primarily on short-term liquidity and operational funding needs, ALM is concerned with the strategic management of the institution’s balance sheet over the medium to long term. Role of…
The National Payments Corporation of India (NPCI) has announced that several key changes to the Unified Payments Interface (UPI) ecosystem will come into effect from August 1, 2025. These updates introduce revised guidelines governing the use of Application Programming Interfaces (APIs) by banks and digital payment platforms, with a focus on features such as AutoPay,…
Interest rate swaps and currency swaps are both widely used financial derivatives designed to manage risk and improve financing efficiency. While they share similarities in structure and function, they differ fundamentally in what is exchanged between the counterparties. Interest Rate Swaps Definition An interest rate swap is a financial contract between two parties to exchange…
Derivatives are financial instruments whose value is derived from the performance of an underlying asset, such as commodities, currencies, interest rates, or equities. Common types of derivatives include futures, forwards, options, and swaps. These instruments are primarily used to manage and mitigate various types of financial risk. Futures Contracts Futures are standardized contracts traded on…
In financial markets, transactions can take place either Over-the-Counter (OTC) or through an Exchange. These represent two distinct methods of buying and selling securities and derivatives, each with its own characteristics, regulatory framework, and risk profile. Key Differences Feature Over-the-Counter (OTC) Exchange-Traded Definition A decentralized market where trades are conducted directly between two parties. A…
Treasury operations, particularly within financial institutions and large corporations, frequently utilize derivatives to manage financial risks and, in some cases, to generate profits. Derivatives are financial contracts whose value is derived from an underlying asset, such as interest rates, currencies, commodities, or market indices. These instruments are integral to modern treasury management, enabling organizations to…