Mastering Interest Rate Risk Strategy

Part 2

UNDERSTANDING THE FIRM’S EXPOSURE TO INTEREST RATE RISK

2. Four sources of exposure to interest rate risk

3. Bank financing as primary source of exposure

INTRODUCTION TO PART 2

Part 2 will help you understand how a firm is exposed to interest rate risk. We will investigate this and will specifically examine the key source of exposure for the firm: bank financing.

Part 1 showed you how not to do it. Part 2 represents the first out of four stages to show you how it is done. In the natural sequence of a firm’s interest rate risk management process, analysing a firm’s sources of exposure to interest rate risk is the first stage. The subsequent stages are discussed in Parts 3, 4 and 5.

I’ll first discuss the four sources of a firm’s exposure ...