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ALM and Cashflow Projections: Key Challenges

August 2, 2022

Asset-Liability Management Cashflow Projections

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 future dates and it is one of the many key inputs for ALM exercise.

Key Challenges in Projecting Cash Flow Details

1. Accurate Cash Flow Dates and Amounts

Knowing accurate cash flow dates and projected amounts of income and maturity flows for each applicable security/contract. This is important for floating rate instruments and interest sensitive OTC derivatives.

Business day conventions: 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
Forward rates: For calculating projected amounts it is important to calculate 'forward rates' through the use of bootstrapping necessary curves – important for interest sensitive instruments

2. What-If Analysis

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. Ad-Hoc Access

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

4. Business Intelligence Integration

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. API Access

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

The Current Reality

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.

What Portfolio Managers Need

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.