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Sovereign Asset and Liability Management: An E-Learning Training Course
I. Balance Sheet Risks
I.i. Currency Matching
I.ii. Interest Rate Matching
I.iii. Maturity Matching
I.iv.Derivatives
II. Methodologies
II.i. Initial Methodologies
II.ii. Advanced Methodologies
Conclusion
Bibliography
Glossary
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Methodologies

Methodologies utilized in developing the optimal SALM framework ranges from the simple in which only a conceptual balance sheet is used to match the characteristics of primary assets and the government’s debt portfolio to complex quantitative techniques.  As the SALM framework becomes more complex, the methodologies utilized are likely to become more advanced.  As models are only as good as the data that support them, much of the decisions regarding which methodology to use will be determined by the resources available to the entity. 

“Debt managers need to make an assessment of the usefulness and feasibility of using quantitative macro models.  This includes an assessment of structural models versus time-series, the complexity, simplicity and the need for robustness; the scope for stress testing; the use of deterministic scenario vs. stochastic simulation models; the employment of these models in benchmarking exercises; performance measurement; the impact of macro-economic volatility; and so on. A dynamic macro SALM framework is conceptually superior as it allows the incorporation of all future flows of tax revenues and expenditures by using a structural macro model that also determines the principal debt costs (such as price indices, interest rates, and exchange rates)” (OECD, 2005).

“Asset and liability managers rarely produce in-house forecasts for the exchange rates, interest rates, and inflation.  When such forecasts are made in-house, they are typically based on historical data using econometric models or are derived from forward curves.  Forecast data are typically received from national statistical agencies or specialized units in the ministry of finance or CB” (Das et al., 2012).

For further information on the different types of models available, please see OECD report on “Analytical Framework for Debt and Risk Management” (page 46).

 

 

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