ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura.

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The Valuation and Hedging of Non-Maturity Deposits: Frequently Asked Questions

01/10/2023 07:53 AM

Donald R. van Deventer[1]

  • First Version: October 31, 2022
  • This Version: January 10, 2023

Abstract

A recent paper by Jarrow, Melnikov, Sherman, van Deventer and Zorn [2022] showed how the discrete time valuation formulas for non-maturity deposits, following Jarrow and van Deventer [1996], can be extended and generalized using risk-neutral valuation. These formulas apply for any number of interest rate risk factors and any form of interest rate volatility as long as the no arbitrage constraints of Heath, Jarrow and Morton[1992] apply. The resulting formulas often have closed form solutions. Even when those closed form solutions become more complex, one can easily calculate a numerical solution that requires only the existing output from a Heath, Jarrow and Morton simulation of risk-free yields plus regression equations that explain the response of deposit rates and balances to changes in the economic environment going forward.

The paper generated a number of thoughtful questions from practitioners and academics.  In this note, we provide brief answers to six of the questions received.

The full text of this paper is available here:

NonMaturityDepositsFAQv2

Footnotes:

[1] SAS Institute Inc.  Copyright 2023 by SAS Institute Inc.  All rights reserved.

ABOUT THE AUTHOR

Donald R. Van Deventer, Ph.D.

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura.

Read More

ARCHIVES