Mastering Interest Rate Risk Strategy

2

Four sources of exposure to interest rate risk

Introduction

Current or future interest-bearing assets or liabilities

Variable interest rate now or in the future

INTRODUCTION

It is obvious that without exposure to interest rates there will be no interest rate risk. There are two conditions for a firm to be exposed to interest rate risk. First, the firm needs to have interest-bearing assets or liabilities. Second, the interest rate related to the source of exposure needs to be variable.

Regarding the first condition for exposure to interest rate risk, we’ll discuss the four possible interest-bearing assets and liabilities that a firm can have: long-term loans, short-term loans, cash and cash equivalents and financial non-current assets. ...