endowments

In recent years, portfolio investment and talent scout acutely attuned to the unique risks of money in their wallets. In particular, flows of capital to the ability to generate sufficient cash, the liability has decreased funding commitments over the past ten years.

As a result, has placed the emphasis on so-called "asset-liability matching. In this brief, we examine an example of ALM. Consider the case that an investment manager hasa series of activities that need to finance a number of liabilities. For simplicity we assume that the assets of these investments are without risk and liabilities consist of a known set of payments in the future.

In an analysis of debt (or liabilities), it is important to measure the "duration" of income (or debt) to electricity. The duration of regular cash flow is the actual duration of a specific set of cash flows. Therefore, the durationsometimes referred to as "effective maturity". It 'also important to know that the duration of a portfolio of assets (or liabilities) is equal to the weighted average maturity of the underlying assets (or liabilities). In addition, the longer the duration of a series of cash flows, the greater the sensitivity to changes in interest rates.

There are several ways to calculate the duration that are beyond the scope of this short, but the majority or a simple calculationHeuristic or a spreadsheet automatically. In both cases, this is a great advantage to know the duration of a series of cash flows. A Noteholder who holds (and reinvested the coupons) bind on time is actually "immune" to changes in interest rates and should be a holding period yield (HPY), which is similar to the yield to maturity of the loan experience.

Of course, there are several assumptions (eg, not for the bond issuer does not default, etc).But in the base case, this term can be very valuable for an investment manager cash flow needs on a specific date and time. is often the case for foundations that have obligations or demands payment of pensions to pensioners.

If an investment manager to calculate the duration of its assets and the duration of their liabilities, can make a determination of interest rate sensitivity of the portfolio, and then appreciate its ability to meet itsfuture obligations. For example, if the duration of assets exceeds the duration of the liabilities of the portfolio, then the structure of the portfolio is vulnerable to interest rates.

For longer duration assets, liabilities are sensitive to interest rates than shorter duration. If interest rates rise, assets with a value faster than the decrease in liabilities. If interest rates remain at this level might be a shortage ofDebt financing.

One way to alleviate this problem is the balance of the portfolio of activities so that the duration of assets equal to the duration of liabilities, so that any interest rate has a negligible effect. If in the previous case, the duration of the portfolio is too high, the duration can be reduced.

This reduction can be achieved through a rebalancing of portfolios with shorter duration of activity (eg, short-term Treasuries or cash) or,Short-circuiting long-lived assets. The market for Treasury zero-coupon (strip) is often used because of the unique result that zero coupon maturity, which are exactly equivalent to their maturities.

If the duration of the portfolio of assets and liabilities of the portfolio to changes in interest rates should have a negligible effect on the structure: the portfolio is said to be adapted for long. This is an excellent example of the value of ALM.

Of course there areother risks such as interest rate risk. In addition, the same duration is not static, and the rebalancing of the portfolio should be dynamic, changing to these changes. But in principle, this form of ALM to help the work, the managers have some control over at least one form of risk in our increasingly complex world of investments.

savings account Cameras