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Asset and liability management (often abbreviated ALM) is the term covering tools and techniques used by a bank or other corporate to minimise exposure to market risk and liquidity risk through holding the optimum combination of assets and liabilities. [1]
Liquidity risk becomes particularly important to parties who are about to hold or currently hold an asset, since it affects their ability to trade. [2] Manifestation of liquidity risk is very different from a drop of price to zero. In case of a drop of an asset's price to zero, the market is saying that the asset is worthless.
Financial risk modeling is the use of formal mathematical and econometric techniques to measure, monitor and control the market risk, credit risk, and operational risk on a firm's balance sheet, on a bank's accounting ledger of tradeable financial assets, or of a fund manager's portfolio value; see Financial risk management.
Extensions to VaR include Margin-, Liquidity-, Earnings-and Cash flow at risk, as well as Liquidity-adjusted VaR. For both (i) and (ii), model risk is addressed [34] through regular validation of the models used by the bank's various divisions; for VaR models, backtesting is especially employed. Regulatory changes, are also twofold.
This risk is especially significant for financial assets and related marketable contracts with complex features and limited liquidity, that are valued using internally developed pricing models. Valuation errors can result for instance from missing consideration of risk factors , inaccurate modeling of risk factors, or inaccurate modeling of the ...
The Liquidity-at-Risk (short: LaR) is a measure of the liquidity risk exposure of a financial portfolio. It may be defined as the net liquidity drain which can occur in the portfolio in a given risk scenario. If the Liquidity-at-Risk is greater than the portfolio's current liquidity position then the portfolio may face a liquidity shortfall.
Liquidity risk is the risk of not being able to efficiently meet present and future cash flow needs without adversely affecting daily operations. Liquidity is evaluated on the basis of the credit union's ability to meet its present and anticipated cash flow needs, such as, funding loan demand, share withdrawals, and the payment of liabilities ...
Liquidity is a prime concern in a banking environment and a shortage of liquidity has often been a trigger for bank failures. Holding assets in a highly liquid form tends to reduce the income from that asset (cash, for example, is the most liquid asset of all but pays no interest) so banks will try to reduce liquid assets as far as possible.