One of the key economic functions of credit institutions is to convert short- term deposits into long-term loans. Depending on the scale of this maturity transformation – which essentially determines the risk arising from a bank’s balance sheet structure – sharply fl uctuating market interest rates can have a considerable impact on banks’ earnings and on their capital base. The increas- ing complexity of markets makes effective processes for measuring and man- aging interest rate exposure an essential business requirement for credit insti- tutions. The fi rst challenge in this respect is to choose the right instruments from among the wide variety that is.
