Managing interest rate risk for non-maturity deposits

For many banks, non-maturity deposits represent a significant part of funding. However, there is still no commonly accepted approach to managing such deposits' interest rate risk. Marije Elkenbracht and Bert-Jan Nauta introduce two dynamic hedge strategies to stabilise the margin between investment return and client coupon. As extensions of Jarrow & van Deventer's model, these strategies can be used for both interest rate risk management and funds transfer pricing

An important goal in modelling non-maturity deposits1 is to find an investment strategy that stabilises the margin independently of interest rate movements. Sales departments prefer a stable margin to help them project and manage their income accurately.

The commonly used replicating portfolio model targets stabilising margins. However, this model contains a static investment rule that does not take into account current markets, which limits its performance.

A step forward was taken by Jarrow &