I am trying to understand how deposits in bank are modelled, and one such modelling approach is replicating portfolio approach as provided in http://www.diva-portal.org/smash/get/diva2:1208749/FULLTEXT01.pdf
Below is the excerpt on how to construct a replicating portfolio
However I failed to understand how exactly Author wants to build the replicating portfolio. Let say I have a deposit amount $N_t$ at time $t$. And as a process of building replicating portfolio, I consider $2$ time buckets i.e. $6M, 12M$, allocation of total deposit amount into these $2$ buckets are $N_{1,t}, N_{2,t}, \left(N_{1,t} + N_{2,t} = N_t\right)$. And 1st time bucket consists of $6$ instruments with $1M$ maturities and similarly second bucket consist of $12$ instruments with $1M$ maturities. Therefore there are $18$ such instruments.
I failed to understand,
- How exactly the principal amounts $N_{1,t}, N_{2,t}$ are allocated into those $18$ instruments?
- What those $18$ instrument each with $1M$ maturities are?
- How exactly they are mimicking my original deposit?
Any insight on above pointers will be very helpful.