Chapter Seven
Value and Valuation: A Conceptual Foundation
The concept of value is not as straightforward as many people believe. The value of any asset depends on several factors: the party for whom the valuation is made, the type of value being measured, the point in time at which the value is being estimated, and the purpose of the valuation. This chapter presents key concepts and definitions of value and valuation that are important to understand when applying the various valuation approaches described in Chapter 6.
Asset-Liability Management
Asset-liability management (ALM) is a risk management technique that often is employed in banking or insurance business that monitor and try to prevent an asset/liability mismatch. ALM has evolved since the early 1980s, and the scope of its activities has widened. In financial firms, ALM is associated with assets and liabilities in those business lines that are accounted for on an accrual basis. This includes bank lending and deposit taking. It includes essentially all traditional insurance activities. The function of ALM is to measure and control three levels of financial risk: interest rate risk (the pricing difference between loans and deposits), credit risk (the probability of default), and liquidity risk (occurring when loans and deposits have different maturities). Today, ALM departments are addressing (nontrading) foreign exchange risks and other risks besides extending to nonfinancial firms. Corporations have adopted techniques ...
