Sivakumar Upadrasta of IRD & Hybrid Structuring Asia ex-Japan said, “Many insurance companies are looking for simple and tailor-made solutions for asset liability management, while traditionally the focus of many banks has been on selling structured investment products generating superior returns. We believe that there is a need to look at the inter-linkages between complex Liability (with various embedded options) and assets which will help in better risk mapping, risk budgeting and developing hedging/investment strategies. Depending on client’s specific problems, we can suggest appropriate strategy after rigorous analysis using spreadsheet modeling. For example, we could suggest a portfolio of swaps/swaptions for duration matching and return engines in the form of structured products to generate high returns; We would leverage our global presence to get access to alternative investments not directly accessible to the insurance company; we would also suggest a suitable hedging strategy for guaranteed rates and downside protection on unit-linked products.”
 

Ling Xia of IRD & Hybrid Structuring Asia ex-Japan said, “IAS 39 deals with all financial assets and liabilities, including derivatives, loans, borrowings, receivables and payables, as well as equity investments in other entities. It requires all these assets and liabilities to be classified into five categories which determine how the financial asset or liability is measured and where any change in fair value is reported, either in the income statement or in equity. However, derivatives are commonly used by companies to hedge a certain financial asset or liability. Under IAS39, they have to be measured at fair value with changes being taken into the profit and loss account. This creates a mismatch in the timing of recognition of gains and losses on either the financial asset or liability or the derivative instrument. Hedge accounting therefore has been created to correct this mismatch by changing the usual accounting treatment of the hedged item or the hedging instrument, so that gains and losses are reflected in the income statement at the same time. A few rate products for hedging liabilities are hedge accounting compliant such as vanilla IRS, forward starting IRS, caps, collars and puttable swap in which client has the right to early terminate the swap.”

The 4^th part of Fixed Income Markets (FIM) Investment Series 2009 will be held in Hong Kong on November 24^th, 2009.