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Disclaimer - Terms and Conditions
Disclaimer - Terms and Conditions
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PRODUCTS - ALMAN (ALM/Risk Department)
How ALMAN assists the Foreign Exchange Rate Risk (FXR) Manager
Foreign exchange ("FX") risk management may be defined as managing exposure to adverse exchange rate fluctuations within an acceptable range at an acceptable cost. ALMAN allows the FXR manager to model an unlimited number of foreign exchange rate views. These can be defined for all of the currencies that the bank are currently trading in, as well as currencies which are considered for future trading.
As is the case with Interest Rate Risk modeling, the ALMAN calculation engine will produce results for strategies based on any number of FX rate views to measure the effect of changes in exchange rates on future projected cash flows.
ALMAN allows the modeler to define each product in terms of a selected currency and thus reporting is done by taking cognizance of current and future FX rates. This allows for reporting based on (current and projected future) cashflows as converted to the base currency. The user can specify currency conversions as direct (e.g. 1 ZAR = 0.1 EURO) or indirect (e.g. 1 USD = 6 ZAR).
In a multi-currency model, all reports (standard ALMAN reports as well as user-defined reports) can be produced for 1 or more selected currencies only. This enables the FXR manager to analyze that portion of his portfolio (or the whole book) that pertains to 1 currency only, so as see the effect of perceived changes in FX rates on the cash flows (and future profitability of the bank).
ALMAN also caters for the following FX derivatives to measure their effectiveness in terms of hedging FX risk:
As is the case with Interest Rate Risk modeling, the ALMAN calculation engine will produce results for strategies based on any number of FX rate views to measure the effect of changes in exchange rates on future projected cash flows.
ALMAN allows the modeler to define each product in terms of a selected currency and thus reporting is done by taking cognizance of current and future FX rates. This allows for reporting based on (current and projected future) cashflows as converted to the base currency. The user can specify currency conversions as direct (e.g. 1 ZAR = 0.1 EURO) or indirect (e.g. 1 USD = 6 ZAR).
In a multi-currency model, all reports (standard ALMAN reports as well as user-defined reports) can be produced for 1 or more selected currencies only. This enables the FXR manager to analyze that portion of his portfolio (or the whole book) that pertains to 1 currency only, so as see the effect of perceived changes in FX rates on the cash flows (and future profitability of the bank).
ALMAN also caters for the following FX derivatives to measure their effectiveness in terms of hedging FX risk:
| • | FX swaps |
| • | Forward Exchange contracts (FECs) |
These deals can be specified as off-balance sheet items so as not to affect the future balance sheet projection reports.
ALMAN calculates and reports on swap costs and accumulated interest swap costs (for FX swaps) and premium costs (for FECs).
To further assist the FXR manager in evaluating possible hedges, ALMAN offers the facility to view each hedging contract in terms of:
ALMAN calculates and reports on swap costs and accumulated interest swap costs (for FX swaps) and premium costs (for FECs).
To further assist the FXR manager in evaluating possible hedges, ALMAN offers the facility to view each hedging contract in terms of:
| • | For FX swaps: |
| • | For FECs |
| O | Capital swap cost |
| O | Total cost |
| O | Yield cost (as percentage of base currency) |
| O | Transaction valued at spot rate |
| O | Transaction valued at forecasted FX rate |
| O | Profit/Loss |
How ALMAN measures Foreign Exchange Rate Risk
The effect of changes in future exchange rates (FX risk) is reflected on each of the standard risk reports in ALMAN.
In addition, ALMAN has a standard Hedge Effectiveness report, which shows:
The effect of changes in future exchange rates (FX risk) is reflected on each of the standard risk reports in ALMAN.
In addition, ALMAN has a standard Hedge Effectiveness report, which shows:
| • | The repricing gap before and after derivatives |
| • | IThe aggregate impact of derivatives |
| • | The cumulative impact on Net Interest Income for rate shocks (up and down) |
| O | Including derivatives |
| O | Excluding derivatives |