Self-Financed Duration Matching Portfolios: An Exercise in Commercial Bank Asset-Liability Management
Michael W. Smyser, Ghirmay S. Ghebreyesus

The purpose of this paper is to describe a student exercise in asset-liability management. Given the funding opportunities of a commercial bank, the objective of the exercise is to determine the optimal allocation of bank funds so that changes in interest rates do not adversely affect the value of bank assets relative to the value of bank liabilities. The exercise demonstrates that the dynamic nature of asset-liability management in practice is a direct result of the local properties of duration and convexity measures. Techniques of dynamic asset-liability allocation are indicated by the solutions to the asset-liability management problem. The exercise provides an experience in the calculation of optimal funds allocations and the analysis of the performance of the portfolios created using a spreadsheet based simulation.

Full Text: PDF     DOI: 10.15640/jfbm.v4n2a1