【正文】 New production modelling (2) ? Law 1 : Invariance of the economic value to financial markets parameters. The economic value that will be produced on future contracts will not depend on the market conditions of the signature date. ? Corollary: the pany produces the same amount of value when interest rates are high or when they are low. ? Example: margins on mortgages and on demand deposits in France ? The new production of customers is done through mortgages production. People are young and usually open their demand deposit account within the bank they sign their mortgage credit. Economic Value ( 3000 € increasing 30 years 0% Demand deposit) + Economic Value (€ 20 years amortising mortgage at long term fixed rate + margin) = Constant (interest rates) M ortg a ge ma rgin in bps0,00%0,05%0,10%0,15%0,20%0,25%0,30%0,0% 2,0% 4,0% 6,0% 8,0% 10,0% 12,0%M ar ke t r ates le v el22 New Models for Asset and Liability Management May 2023 Summary ? Necessity and opportunity to develop new models in ALM ? ALM indicators weaknesses ? ALM Models weaknesses ? ALM IT development ? New ALM models for Customer behaviour ? Amount projection modelling, wealth effect ? Customer arbitrage modelling, pensation effects ? New production modelling ? New ALM techniques to design hedging strategies ? Reconciliation between economic value and accounting value ? ALM delta Hedging ? Taking uncertainty into account ? Conclusion ? Revenue Backtesting ? What about liquidity? 23 New Models for Asset and Liability Management May 2023 Reconciliation between economic value and accounting value ? Economic value is equal to the expectancy of the sum of the actualised future cashflows (linked with the existing customers) ? It is also equal to the expectancy of the sum of the future actualised ines (linked with the existing customers) ? According to “Law 1”, the expectancy of the sum of the actualised cash flows linked with new customers is not sensitive to the financial markets levels ? Consequently, making each future ine expectancy not sensitive to the financial markets level will make insensitive the economic value to the financial markets. In other words, with a high level of modelling, it is possible to reconcile sensitivity indicators and interest rate gap based indicators such as economic capital ?????????? ?? ? ?h ori zo n t).(s toc kt tdssreEEV?????????? ?? ? ?h ori zo n t).(s toc kt tdssreneEEVth ori zo n t).(p rod u ctio n n ewt 0 ??????????? ?? ? t dssreneE ??????????? ?? ??h oriz o n t).(p rod u ctio n n ew s toc k t tdssrenedEV24 New Models for Asset and Liability Management May 2023 Delta hedging in ALM ? Making the ine insensitive is possible through delta hedging techniques. ? Stage 1: putation of the Greeks (Sensitivities of the actualised expected ines) ? Stage 1: Hedging definition ? Delta = forward swaplet ? Gamma = forward Caplet / Floorlet ? Penta = forward CMS swap ? Penta gamma = forward CMS Caplet / Floorlet ? Law 2 : Anaxagoras of Clazomenae “Nothing is lost, nothing is created, everything is transformed”. As for Delta Hedging in the Trading Room, it is possible to replicate the expected ine through the delta hedging strategy ? latter by Lavoisier 171。 wealth effect 187。 . ?????????? ???? ?? t dssrtt eneLiborDelt a 0).(p rod u ctio n n ew s toc k t .IE? ?y v o l a t i l i tda n t i c i p a t er e a l i z e dG a m m a . ( T )I n c o m eI n c o m e ( T )S t r a t e g y D e l t a)(s t r a t e g y w i t h o u t I n c o m e 0 d a t ea t f o r e c a s t e d ???T25 New Models for Asset and Liability Management May 2023 Taking into account uncertainty ? There are many sources of uncertainty ? Uncertainty on the databases and on the estimation ? Closure rate estimation ? Average amount by account estimation ? Uncertainty linked with Seasonality effects ? Including intramonthly seasonality ? Risk of regulation change ? Probability of regulatory change of Demand deposits to a fully Libor indexed product ? Risk of modelling ? Many models have to be improved and backtested ? Risk of not taking into account some parameters (wealth effects…) ? Uncertainty has to be taken into account in the economic value putation ? The putation has to be done under a Risk neutral probability or a martingale minimal probability ? More uncertainty leads to a shorter placement of demand deposits. 26 New Models for Asset and Liability Management May 2023 Delta hedge Example on Demand Deposits ? It is possible to translate the modelling in terms of schedules ? Demand deposit schedule = deltas of demand deposit ine Dem a nd de posi t sc hedule s 20 40 60 80 100 120 140 Y Y + 1 Y + 2 Y + 3 Y + 4 Y + 5 Y + 6 Y + 7 Y + 8 Y + 9 Y + 10 Y + 11 Y + 12 Y + 13 Y + 14 Y + 15 Y + 16 Y + 17 Y + 18 Y + 19 Y + 20Ho r iz o n1 : Cl os i ng r ate2 : 1+ av erage am ou nt by ac c ou nt3 : 2 + w ea l th ef f ec t4 : 3 + v ol um e e f f ec t5 : 4 + c om pe ns ati on ef f ec t a nd un c ertai nty6 : 5 + ne w produ c ti on27 New Models for Asset and Liability Management May 2023 Summary ? Necessity and opportunity to develop new models in ALM ? ALM indicators weaknesses ? ALM Models weaknesses ? ALM IT development ? New ALM models for Customer behaviour ? Amount