Interest Rate Risk Management: Developments in Interest Rate Term Structure Modeling for Risk Management and Valuation of Interest-Rate-Dependent Cash Flows

This paper surveys the main concepts and techniques of recent developments in the modeling of the term structure of interest rates that are used in the risk management and valuation of interest-rate-dependent cash flows. These developments extend the concepts of immunization and matching to a stochastic interest rate environment. Such cash flows include the cash flows on assets such as bonds and mortgage-backed securities as well as those for annuity products, life insurance products with interest-rate-sensitive withdrawals, accrued liabilities for defined-benefit pension funds, and property and casualty liability cash flows.