Fair Value and Interest Rate Risk of Demand Deposits
Fair Value and Interest Rate Risk of Demand Deposits

Summary/Abstract: Demand deposits play an important role for commercial banks as they represent relatively reliable funding base as well as a source of income (they are re-munerated bellow market rates, sometimes even at zero rates). At the same time, demand deposits are also responsible for significant part of volatility of profit and loss (P&L) – both economic and accounting. This paper demonstrates how the interest rate risk of demand deposits may be assessed and hedged under earnings perspective and economic value perspective and discusses whether these approaches are consistent with low volatility of accounting P&L.

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