Matching assets to corresponding liabilities i.e. asset-liability management (ALM) is critical for multi-asset portfolio managers with fixed income/swaps and also for firms such as insurance and corporate treasury groups.

Portfolio’s holding such instruments provide income and/or principal at futures dates and it is one of the many key inputs for ALM exercise.

So what are some of the key challenges in projection cash flow details?

1. Knowing accurate cash flow dates and projected amounts of income and maturity flows for each applicable security/contract. This is important for floating rate instrument and interest sensitive OTC derivatives.
1a. To get accurate cash flow dates, the use of right business day conventions (by currency/security) is important and such data needs to be captured and used in projection calculations

1b. For calculating projected amounts it is important to calculate ‘forward rates’ through the use of bootstrapping necessary curves – important for interest sensitive instruments

2. Ability to perform What-If analysis to understand change to cash flows when adding and/or removing positions in the portfolio – a must for portfolio construction/optimization/hedging use cases.

3. Ability to get the projections data ‘ad hoc’ i.e. upon request – by both contract and at the portfolio level

4. Provide data in a way the business intelligence tools can visualize projected cash flows by date for various currencies/dates for more efficient analysis.

5. Enable extracting cash-flow data using APIs so external systems and/or tools such as Excel can consume this data for further analysis.

Most systems currently will get cash-flow projections on fixed rate instruments. However, when complex instruments are part of the portfolio, assumptions around the forward rates such as the use of current rate as the forward rate, etc. may not be what the portfolio manager would be happy to use for analysis.

Last, the ability to know projected cash-flows ‘ad hoc’ and perform what-if analysis along with BI integration is what both portfolio managers and investors ‘need’ in order to better understand and analyze their portfolios.