CHAPTER 6Balance Sheet Management: Money Markets, FX, Trading and Hedging, and Securitisation


The practice of ALM involves both tactical processes as well as strategic oversight. This chapter addresses the key principles of tactical balance sheet management, addressing primary features of hedging interest rate risk and cash management. We describe the main money market instruments, and the use of different types of interest rate derivatives to manage interest rate risk. Many banks around the world operate multi-currency balance sheets, and we discuss the basic principles of FX hedging. Finally there is an introduction to the use of securitisation for balance sheet management purposes.

In this chapter we introduce balance sheet management practice, the primary function of the ALM desk. The ALM and money markets desk supports the banking, fixed-interest and equities desks, hedging new issues, and working with the swaps and options desks. In some banks it will be placed within the Treasury or money markets areas, whereas other firms will organise it as an entirely separate function. Wherever it is organised, the need for clear and constant communication between the ALM desk and other operating areas of the bank is paramount.

Readers should be familiar with the financial instruments, and their derivatives, used in money markets by banks to assist in their core business of lending to and taking deposits from customers. For cash management purposes as well as facilitating ...

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