Asset and liability management is the term covering tools and techniques used by financial institutions to manage various types of risk while achieving its profit objectives by holding the optimal combination of assets and liabilities. We introduce the fundamental principles of asset and liability manage- ment in Chapter 13. An appreciation of these concepts and tools is essen- tial to an understanding of the functioning of the global money markets.

The final chapter of the book, Chapter 14, describes bank regula- tory capital issues. As noted, the primary players in the global money markets are large financial institutions, in particular depository institu- tions. These entities are subject to risk-based capital requirement.

The asset allocation decisions by managers of depository institutions are largely influenced by how much capital they are compelled to hold and the capital costs incurred.

As a result, these money market participants must risk-based capital issues regardless of the products they trade or else they will not fully understand the cost of their own capital or the return on its use.

CHAPTER2

Money Market Calculations

he intent of this chapter is to introduce some of the fundamental money market calculations that will be used throughout this book.

We will cover such topics as day count conventions, as well as the basic formulas for price and yield.

DAY COUNT CONVENTIONS

To those unfamiliar with the workings of financial markets, it may come as a shock that there is no widespread agreement as to how many days there are in a year. The procedures used for calculating the number of days between two dates (e.g., the number of days between the settle-