AO vs ALM

[june2009]

Old exams asked for when to use each and advantages/disadvantages of each. Struggling to find advantages/disadvantages
ALM - think pensions and life insurance
Use it when:
risk averse
large penalty for not meeting liabilities
liab are i rate sensitive
incentive for holding fixed income (tax, regulatory, legal, etc)
Advantage/disadvatages:
??
AO - think endowments and foundations
Use it when:
higher risk tolerance
focus on growth
minimal explicit/mandated liabilities
Advantage/disadvatages:
??

 

[abushey31]

Advantages/Disadvantages of each pretty simple in my mind:
AO
Advantage: More simple in practice…don’t have to worry about liabilities
Disadvantage: Not appropriate for institutions with significant liabilities to match
ALM
Advantage: Takes directly into account liabilities…if done properly minimizes risk
Disadvantage: In practice, relatively more difficult to use…therefore only appropriate for institutions with significant liabilities