economy. Another risk factor is liquidity. From a banking and Treasury point of view the term liquidity means funding liquidity, or the "nearness" of money. The most liquid asset is cash. Banks bear several interrelated liquidity risks, including the risk of being unable to pay depositors on demand, an inability to raise funds in the market at reasonable rates, and an insufficient level of funds available with which to make loans. Banks keep only a small portion of their assets in the form of cash because cash earns no return for them. In fact, once they have met the minimum cash level requirement, which is something set down by inter- national regulation, they will hold assets in the form of other instru- ments. Therefore, the ability to meet deposit withdrawals depends on a banks ability to raise funds in the market. The market and the publics perception of a banks financial position heavily influences liquidity. If this view is very negative, the bank may be unable to raise funds and consequently be unable to meet withdrawals or loan demand. Thus, liquidity management is running a bank in a way that maintains confi- dence in its financial position. The assets of the banks that are held in near-cash instruments, such as Treasury bills and clearing bank CDs, must be managed with liquidity considerations in mind. The asset book on which these instruments are held is sometimes called the liquidity book.     The general term asset and liability management entered common usage from the mid-1970s onwards. In the changing interest rate environ- ment, it became imperative for banks to manage both assets and liabilities simultaneously, in order to minimize interest rate and liquidity risk and maximize interest income. ALM is a key component of any financial insti- tutions overall operating strategy. In the era of stable interest rates that preceded the breakdown of the Bretton-Woods agreement, ALM was a more straightforward process, constricted by regulatory restrictions and the saving and borrowing pat- tern of bank customers.1The introduction of the negotiable Certificate of Deposit by Citibank in the 1960s enabled banks to diversify both their investment and funding sources. With this innovation there developed the concept of the interest margin, which is the spread between the interest earned on assets and interest paid on liabilities. This led to the concept of the interest gap and the management of the gap, which is the cornerstone of modern-day ALM. The increasing volatility of interest rates, and the rise in absolute levels of rates themselves, made gap management a vital part of running the banking book. This development meant that banks could no longer rely on permanently on the traditional approach of bor- rowing short (funding short) to lend long, as a rise in the level of short- term rates would result in funding losses. The introduction of derivative