Handbook of Asset and Liability Management: From models to optimal return strategies

15

Examples of Products Partially Correlated with Financial Markets

C'est une belle harmonie quand le faire et le dire vont ensemble. (Montaigne)

Financial risks may be present in ALM books due to implicit reasons:

• the presence of a correlation between cash flows (interests, commissions or costs) and financial markets; or
• the presence of embedded options in the product.

15.1 PRESENCE OF CORRELATION BETWEEN THE CASH FLOWS AND FINANCIAL MARKETS: EXAMPLES OF CREDIT CARD

There is sometimes a correlation between the interest rates paid to a customer (or received from him) and the market rates but without a direct indexation. We saw the example of savings accounts where the correlation between the savings rate and the market rates is implicit and not explicit.

Credit cards loans (or revolving credits) are another good example of partial correlation between the charged interest rates and the market rates.

The interest rate proposed to the customer is either a free interest rate or a regulated interest rate. The modelling of such an interest rate is similar to the modelling of the savings interest rates.

This interest rate has to represent the rate that protects the bank against a customer arbitrage.

The representation of credit cards in indicators will follow the same methodology as for savings. We base the computation of the liquidity schedule on the existing accounts with their ...