Sample interview questions: Can you explain the concept of asset-liability management?
Sample answer:
Asset-Liability Management (ALM)
Asset-Liability Management (ALM) is a financial strategy employed by institutions, primarily banks and insurance companies, to manage the risks arising from mismatches between their assets and liabilities. The objective of ALM is to ensure that the institution has sufficient assets to meet its liabilities, while minimizing the impact of interest rate and market fluctuations.
Key Concepts:
- Maturity Matching: Matching the maturities of assets and liabilities to reduce the risk of liquidity shortfalls and interest rate sensitivity.
- Interest Rate Hedging: Using derivatives and other instruments to mitigate the impact of unexpected changes in interest rates on the institution’s net income and balance sheet.
- Cash Flow Forecasting: Projecting future cash flows to anticipate potential mismatches and develop strategies to address them.
- Stress Testing: Simulating extreme market conditions to assess the institution’s ability to withstand adverse events and maintain financial stability.
- Regulatory Compliance: Adhering to regulations and guidelines governing ALM practices, such as Basel Accords and Solvency II.
Advantages of Effective ALM:
- Reduced Risk: Minimizes finan… Read full answer