Example: Plain vanilla interest rate swap

For interest rate risk measurement the variable leg of an interest rate swap
would ‘end’ at the next fixing date of the variable interest rate. For interest rate
considerations the notional amount could be exchanged at that date. For liquidity
risk measurement, the variable leg of a swap matures at the end of the lifetime
of the swap. The payments can be estimated using the forward rates.
In order to optimize their liquidity management, the treasury function of a FI
is faced with the problem of determining the term structure of liquidity for their
assets and liabilities. For many investment banking products, such as derivatives
and fixed-income products this is a straightforward task as payment dates are
often known in advance and the estimated amounts can be derived from the
pricing formulae. An exception is obviously the money market and repo business.
A more challenging task (and more important in terms of liquidity) is the term
structure of liquidity for the classic commercial banking products, such as
transaction accounts, demand deposits, credit card loans or mortgages (prepayments)
as these products have no determined maturity.