Chittagong University Center for Business Administration (CUCBA)

Faculty of Business Administration

University of Chittagong
Course Name: Bank Fund Management (Fin-642)

Assignment On:
Chapter 1: Introduction
Chapter 2: Asset & Liability Management
Submitted To:
Taslima Akther
Assistant Professor, Department of Banking & Insurance
Faculty of Business Administration
University of Chittagong.
Submitted By:
Sanjida Ashrafi Ananya
ID: BG213071509, 4th Semester
18th Batch (BG), CUCBA.

Date of Submission: 29th June, 2022.

A. Which accounts are most important and which are least important on the asset side of a
bank’s balance sheet?
Answer: A balance sheet, or Report of Condition, lists the assets, liabilities, and equity capital
(owners’ funds) held by or invested in a bank or other financial firm on any given date. In the
balance sheet of a bank, there are some accounts in asset side which are ranked in order to
determine the most important and least important-

Rank order Accounts of Asset side

1 Cash and Due from Depository Institutions
2 Investment Securities
3 Loans & Leases
4 Miscellaneous Assets

Here is the short description of the accounts below-

1. Cash and Due from Depository Institutions: Cash assets (C) are designed to meet the
financial firm’s need for liquidity (i.e., immediately spendable cash) in order to meet
deposit withdrawals, customer demands for loans, and other unexpected or immediate cash
needs. The first asset item normally listed on a banking firm’s Report of Condition is cash
and due from depository institutions. This item includes cash held in the bank’s vault, any
deposits placed with other depository institutions (usually called correspondent deposits),
cash items in the process of collection (mainly uncollected checks), and the banking firm’s
reserve account held with the Federal Reserve bank in the region. The cash and due from
depository institutions account is also referred to as primary reserves.
2. Investment Securities: Security holdings (S) are a backup source of liquidity and include
investments that provide a source of income.
i. Liquid portion: A second line of defense to meet demands for cash is liquid security
holdings, often called secondary reserves or referenced on regulatory reports as
“investment securities available for sale.” These typically include holdings of short-
term government securities and privately issued money market securities, including
interest-bearing time deposits held with other banking firms and commercial paper.
Secondary reserves occupy the middle ground between cash assets and loans, earning
some income but also held for the ease with which they can be converted into cash on
short notice.
ii. The Income-Generating Portion: Bonds, notes, and other securities held primarily
for their expected rate of return or yield are known as the income generating portion of
investment securities. (These are often called held-to-maturity securities on regulatory
reports.)
 3. Loans & Leases: By far the largest asset item is loans and leases, which often account for
half to almost three-quarters of the total value of all bank assets. A bank’s loan account
typically is broken down into several groups of similar type loans.
4. Miscellaneous Assets: This account includes investments in subsidiary firms, customers’
liability on acceptances outstanding, income earned but not collected on loans, net deferred
tax assets, excess residential mortgage servicing fees receivable, and all other assets.

B. What are the essential differences among demand deposits, savings deposits, and time
deposits?

Demand Deposits Savings Deposits Time Deposits

Time deposits carry a fixed

Demand deposits, or regular maturity and the bank may
Savings deposit permit the
checking accounts, generally impose a penalty if the customer
customer to withdraw at will.
permit unlimited check writing withdraws funds before the
maturity date is reached.

The interest rate posted on time

Generally, bear the lowest rate
Under federal regulations, they deposits is negotiated between
of interest offered to
cannot pay any explicit interest the bank and its deposit
depositors but may be of any
rate. customer and may be either
denomination.
fixed or floating.

C. What factors have motivated financial institutions to develop funds management

techniques in recent years?
The traditional view that all income received by financial firms must come from loans and
investments has given way to the notion that financial institutions today sell a bundle of financial
services—credit, payments, savings, financial advice, and the like—that should each be priced to
cover their cost of production. The maturing of liability management techniques, coupled with
more volatile interest rates and greater risk, eventually gave birth to the funds management
approach, which dominates today. Some factors have motivated financial institutions to develop
funds management techniques in recent years-
i. Ensuring more control practices: In the Fund Management strategy, management
exercise as much control as possible over the volume, mix, and return or cost of both
assets and liabilities in order to achieve the financial institution’s goals
 ii. Consistent control over asset-liability management: Management’s control over
assets must be coordinated with its control over liabilities so that asset management
and liability management are internally consistent and do not pull against each other.
iii. Maximize spread: Effective coordination in managing assets and liabilities will help
to maximize the spread between revenues and costs and control risk exposure.
iv. Development of management policy: Revenues and costs arise from both sides of
the balance sheet (i.e., from both asset and liability accounts). Fund management
strategies helps to accelerate the management policies to developed that maximize
returns and minimize costs from supplying services.

D. What is the goal of hedging?

The goal of hedging in banking is to freeze the spread between asset returns and liability costs and
to offset declining values on certain assets by profitable transactions so that a target rate of return
is assured.
Hedging is a financial strategy that aids investors in curbing the downside impact from the
potential of other tradable securities, including stocks, bonds, commodities, currencies, options
and futures. While hedging does not reduce the risk of losing money on an investment, it does
mitigate that risk. That makes hedging a valuable tool for investors looking for some downside
protection on a regular basis.
Typically, hedging is considered a risk-management strategy, as its primary goal is to cut or
severely reduce the risk of losing money via investments due to market uncertainty. Investment
prices ebb and flow, sometimes dramatically so, all the time. Hedging offsets those uncertainty
risks by ducking those larger trading losses and (hopefully) locking in a profit on a specific trade.
In layman's terms, that means hedging a single asset or investment by investing in another asset or
investment, to protect against the loss of money.

E. How can you tell if you are fully hedged using duration gap analysis?
I can tell a financial institution is fully hedged when the dollar weighted duration of the assets
portfolio of the bank equals the dollar weighted duration of the liability portfolio.
With a leverage-adjusted duration gap of zero, the financial firm is immunized against changes in
the value of its net worth. Changes in the market values of assets and liabilities will simply offset
each other and net worth will remain where it is.
This means that the bank has a portfolio immunization (duration gap= 0) position when it is fully
hedged. Of course, because the bank usually has more assets than liabilities the duration of the
liabilities needs to be adjusted by the ratio of total liabilities to total assets to be entirely correct.