ALM desk or unit of a bank is a specialized business unit that fulfills a range of functions. Its precise set of duties will be driven by the type of activities in which the financial institution is engaged. Let us consider the main types of activities that are carried out. If an ALM unit has a profit target of zero, it will act as a cost center with a responsibility to minimize operating costs. This would be consis- tent with a strategy that emphasizes commercial banking as the core busi- ness of the firm, and where ALM policy is concerned purely with hedging interest-rate and liquidity risk.     The next level is where the ALM unit is responsible for minimizing the cost of funding. That would allow the unit to maintain an element of exposure to interest-rate risk, depending on the view that was held as to the future level of interest rates. As we noted above, the core banking activity generates either an excess or shortage of funds. To hedge away all of the excess or shortage, while removing interest-rate exposure, has an opportunity cost associated with it since it eliminates any potential gain that might arise from movements in market rates. Of course, without a complete hedge, there is an exposure to interest-rate risk. The ALM desk is responsible for monitoring and managing this risk, and of course is credited with any cost savings in the cost of funds that arise from the exposure. The saving may be measured as the difference between the funding costs of a full hedging policy and the actual policy that the ALM desk adopts. Under this policy, interest-rate risk limits are set which the ALM desk ensures the banks operations do not breach. The final stage of development is to turn the ALM unit into a profit center, with responsibility for optimizing the funding policy within speci- fied limits. The limits may be set as gap limits, value-at-risk limits or by another measure, such as level of earnings volatility. Under this scenario, the ALM desk is responsible for managing all financial risk. This ultimate development of the ALM function has resulted in it tak- ing on a more active role. The previous paragraphs described the three stages of development that ALM has undergone, although all three ver- sions are part of the "traditional" approach. Practitioners are now begin- ning to think of ALM as extending beyond the risk management field, and being responsible for adding value to the net worth of the bank, through proactive positioning of the book and hence, the balance sheet. That is, in addition to the traditional function of managing liquidity risk and interest-rate risk, ALM should be concerned additionally with man- aging the regulatory capital of the bank and with actively positioning the