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Risks Associated With Asset/Liability Management Approaches

Asset/liability management approaches seek to match assets with future liabilities. The strategy is subject to three major risk factors:

  1. Interest rate risk – assets decline in value as interest rates rise. If assets must be sold in order to meet one liability, a shortfall could arise with respect to future liabilities.
  2. Contingent claim risk – contingent claims could halt interest payments or result in an early return of principal which would have to be reinvested at lower prevailing interest rates.
  3. Cap risk – caps on floating rate payments prevent assets from performing in line with interest rates.
For more information, see all articles on: Asset Allocation, FInancial Planning, Fixed income investments, Investing in bonds, Investment Returns, Portfolio Management

See also:
  • Enterprise Risk Management
  • Risk Governance
  • Identifying Financial Risk Exposures
  • Dynamic and Static Approaches to Asset Allocation
  • Investment Risk Management Process
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    This entry was posted on Monday, December 24th, 2007 at 7:14 am and is filed under Asset Allocation, FInancial Planning, Fixed income investments, Investing in bonds, Investment Returns, Portfolio Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

    2 Responses to “Risks Associated With Asset/Liability Management Approaches”

    1. Enterprise Risk Management - Financial Education - Everything You Need To Know About Finance Says:

      [...] and default risk, asset/liability management, operational systems, fraud and other [...]

      January 29th, 2008 at 7:58 am

    2. Identifying Financial Risk Exposures - Financial Education - Everything You Need To Know About Finance Says:

      [...] Market risk relates to interest rates, exchange rates, stock prices and commodity prices. How will changes in these factor affect the portfolio, particularly in the context of asset/liability management? [...]

      February 29th, 2008 at 7:06 am

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