Almost all firms are exposed to interest rate risk, but it can manifest itself in different ways.
This article, written by Will Spinney, Education Development, ACT was originally published at QFinance, and is reproduced with permission.
Executive Summary
- Interest rate risk can manifest itself in several different ways.
- It is best managed within the context of the firm and a risk framework.
- Proper evaluation or measurement is key.
- Selection of a good key performance indicator is essential.
- A typical response to interest rate risk is a transfer of risk to another party.
- Many risk transfer tools are available, of which interest rate swaps are the most popular.
- The risk is usually transformed rather than eliminated.
Introduction
Almost all firms are exposed to interest rate risk, but it can manifest itself in different ways. A proper response to this risk can only come following a full understanding of the context of the firm and its strategy, along with a full evaluation of the risk. Firms should generate a well thought out key performance indicator (KPI) and then apply one or more of the many tools available in the market to transfer interest rate risk.
