Asset/Liability Management

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Definition of 'Asset/Liability Management'

Asset/liability management (ALM) is the process of managing a company's assets and liabilities to ensure that the risks and returns are aligned with the company's overall objectives. This can be done by matching the maturities of assets and liabilities, by hedging against interest rate risk, and by managing the credit risk of the assets.

ALM is important for all companies, but it is especially important for financial institutions, such as banks and insurance companies. This is because financial institutions are exposed to a variety of risks, including interest rate risk, credit risk, and liquidity risk. ALM helps to mitigate these risks by ensuring that the company has the right mix of assets and liabilities to meet its obligations.

There are a number of different ways to manage assets and liabilities. One common approach is to use a maturity ladder. A maturity ladder is a chart that shows the maturities of the company's assets and liabilities. This chart can be used to identify any mismatches between the maturities of assets and liabilities.

Another approach to ALM is to use a cash flow matching strategy. A cash flow matching strategy is a strategy that matches the cash flows from the company's assets with the cash flows from its liabilities. This can be done by investing in assets that have the same cash flow pattern as the company's liabilities.

ALM is an important part of financial risk management. By managing its assets and liabilities, a company can reduce its risk and improve its profitability.

Here are some additional details about ALM:

* ALM is a dynamic process that must be constantly adjusted to changes in the market.
* The goal of ALM is to achieve a balance between risk and return.
* ALM is not just about managing the risks of individual assets and liabilities. It is also about managing the risks of the entire portfolio.
* ALM is an important part of the overall risk management process.

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