Managing interest rate risk

Managing interest rate risk has always been at the core of the risk management function of banks and corporates. Interest rate risk is the risk that an investment’s value will change due to a change in the absolute level of interest rates, in the spread between two rates, in the shape of the yield curve or in any other interest rate relationship. Such changes usually affect securities inversely and can be reduced by diversifying (investing in fixed-income securities with different durations) or hedging.

The trends in interest rate movements have been influenced by a host of factors, such as, policy actions on the rate front and open market operations conducted by the Central Bank, upward revision in FII investment limits in Government securities, broadening of investor base for investment in Government securities, persistence of inflationary pressure, etc.

 How currency and  interest rate risks could be managed.

  • Corporates must careful about the risks associated with un-hedged exposures.
  • Careful selection of hedging instruments.
  • Careful about the risks associated with excessive leverage
  • Corporates must focus on their core businesses and not looking at currency mismatches to generate extra profit (Corporates often leave their foreign exchange exposures unhedged to benefit from the movement of the currency in their favor and save the cost of hedging rather than concentrating on their core business to generate profits. Derivatives are often used as instruments for generation of profit rather than as instruments for risk mitigation).