Chapter 1-4 treasury

asset liability management

is a financial strategy used by banks and financial institutions to manage and balance their assets and liabilities.

asset liability management

It allows banks to manage risks arising from mismatches in assets and liabilities, interest rate fluctuations, and liquidity constraints.

gap analysis

Identifies mismatches between assets and liabilities in terms of maturities or interest rate sensitivity.

duration analysis

Measures how sensitive a portfolio is to changes in interest rates.

monte carlo simulation

Models different economic scenarios to evaluate potential risks and outcomes.

ALM analyst

Focuses on data analysis and financial modeling

ALM manager

Oversees strategy, compliance, and risk alignment

ALM trader

Engages in trading and hedging to manage risk exposure

risk manager

Identifies, measures, and mitigates financial risks

ALM in banks

Banks typically have short-term liabilities (such as customer deposits) and long-term assets (such as loans).

liquidity risk and deposit behavior

Unpredictable deposits and withdrawals can create uncertainty in cash flow, leading to liquidity challenges and potential overdrafts. Proper ALM helps prevent such instability.

bank reserves

_____ are funds set aside to cover unexpected withdrawals or losses. They are a vital component of a bank’s liquidity management and overall stability.

importance of financial ratios

Financial ratios allow stakeholders to assess a bank’s stability, safety, and profitability.

loan to deposit ratio

LDR

high LDR

A ______ indicates higher risk and lower liquidity.

low LDR 

A ______ shows financial safety but may limit profitability

ideal LDR

The ______ maintains a balance between profitability and liquidity.

bank levy

A _______ allows creditors to collect debts directly from a customer’s bank account through a legal process.

bank run

A ______ occurs when a large number of depositors withdraw funds simultaneously due to fear of the bank’s insolvency. Trust and confidence are critical; once lost, they can trigger widespread withdrawals.

The Great Depression (1929)

Massive stock market collapse led to widespread bank failures. Resulted in the Glass-Steagall Act (1933) and Securities Exchange Act (1934).

2008 Financial Crisis

Triggered by the housing market collapse, subprime lending, and excessive risk-taking through financial instruments such as CDOs.

Silicon Valley Bank (2023)

Rapid withdrawals of $42 billion from primarily tech startup clients.

Washington Mutual (2008)

Losses from adjustable-rate mortgages and deposit withdrawals.

Lehman Brothers

Liquidity crisis and bankruptcy following exposure to mortgage-backed securities.

supply and demand for credit

Increased demand raises rates; increased supply lowers rates.

inflation

higher ______ typically leads to higher interest rates.

government and central bank policy

Central banks, such as the Federal Reserve or Bangko Sentral ng Pilipinas (BSP), influence rates through monetary policy decisions. The federal funds rate affects the rates charged on loans and deposits.

financial market

The _______ is where buyers and sellers trade assets such as stocks, bonds, and derivatives. It includes money markets, bond markets, mortgage markets, stock markets, derivatives markets, foreign exchange markets, and interbank markets.

bond market

Also called the debt or fixed-income market, where investors lend money to issuers in exchange for interest payments.

primary market

new issues are sold for the first time

secondary market

investors trade existing securities

investor actions

buying increases prices; selling decreases them.

business conditions

profits, sales, and industry performance affect value.

government actions

policies, taxes, and interest rates influence investments.

economic indicators

GDP, inflation, budget deficits, and unemployment.

international events

wars, trade issues, and currency changes affect global markets.

stock market

A marketplace for buying and selling company shares.

futures market

Used to hedge against price risk. Example: A farmer sells a futures contract to lock in the price of crops before harvest.

bull market

prices generally rising; investor optimism.

bear market

prices falling; investor pessimism.

exchange trading

organized places like the New York Stock Exchange or Chicago Board of Trade.

OTC trading

decentralized network of dealers trading directly without an exchange.

portfolio theory

Introduced by Harry Markowitz, focuses on balancing risk and return by diversifying assets.

ex-ante

predicted or expected return (before the event).

ex-post

actual or historical return (after the event).

mean-variance analysis

Measures how much risk (variance) an investor is willing to accept for a given expected return.

fixed-income market

The _______ is where investors buy and sell debt securities that pay regular, fixed interest such as bonds, notes, and loans. It provides long-term, cost-effective funding for governments, corporations, and financial institutions.

sovereign bonds

issued by national governments, low-risk.

non-sovereign bonds

issued by local governments.

quasi-government bonds

issued by partly government-owned entities (like GSIS or Pag-IBIG).

supranational bonds

issued by international organizations such as the World Bank or Asian Development Bank.

commercial paper

short-term unsecured debt for quick financing

corporate bonds or notes

long-term debt with regular interest payments.

medium-term notes

offered continuously with flexible maturities.

asset-backed securities

backed by assets like car loans, credit card payments, or mortgages.

mortgage-backed securities

backed by groups of home loans; investors earn from borrowers’ payments.

collateralized loan obligations

backed by company loans and divided into tranches with different risk levels.

asset-backed securities

ABS

mortgage-backed securities

MBS

collateralized loan obligations

CLOs

inflation-linked bonds

bond value rises with inflation.

floating-rate bonds

interest changes depending on market rates.

repurchase agreements

short-term loans backed by collateral.

securitization

The process of pooling loans or receivables (like mortgages or installment loans) and turning them into tradable securities. Examples include ABS and MBS. This allows lenders to raise new funds while investors earn from future payments.

financial derivatives

Contracts whose value depends on another asset such as a currency, bond, or commodity. They are used for hedging, speculation, or risk management.

spot market

Immediate currency exchange at the current rate.

forward market

Contract to buy/sell currency in the future at a fixed rate (used for hedging).

futures market

Standardized contracts traded on exchanges for future delivery of currency.

commercial banks

Trade for clients and themselves.

central banks

Manage monetary policy and stabilize currency values.

corporations

Hedge risks in international trade.

hedge funds/investment firms

Trade for profit.

retail traders

individuals trading online.

governments

Maintain economic stability through intervention.

free float

Value set by market forces (e.g., USD, JPY).

pegged rate

Linked to another currency but can slightly adjust.

managed float

Mostly market-determined but occasionally controlled by government.

cross rate

Exchange rate between two non-USD currencies calculated using USD as a reference. Example: EUR/JPY = (USD/JPY ÷ USD/EUR).

forward exchange contract

A private agreement to exchange currencies in the future at a set rate. Used to hedge against exchange rate risk.

foreign exchange swap

Two parties exchange currencies now and agree to reverse the trade later at a fixed rate. Used for hedging, managing liquidity, or speculation.

forwards

Private agreements to buy or sell at a fixed rate on a future date; customized and OTC.

futures

Standardized contracts traded on exchanges; require margin deposits.

options

Give the right (not obligation) to buy or sell at a fixed price before a certain date; buyer pays a premium.

swaps

Agreements to exchange cash flows or currencies over time; manage interest rate or currency risks.

hedging

A risk management strategy using derivatives to offset potential losses. Example: Buying a futures contract to lock in prices or protect against unfavorable changes.

currency options

Contracts giving the right (not obligation) to buy or sell a currency at a fixed rate in the future.

call option

right to buy

put option

right to sell

real effective exchange rate

Measures a currency’s value against a basket of other currencies, adjusted for inflation — showing if it’s overvalued or undervalued.

real effective exchange rate

REER

money market

Part of the financial market that trades short-term, high-liquidity instruments