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Of Borrowings Will Increase or Returns From Deposits Will Fall As A Result of Movements in Interest Rates"
Of Borrowings Will Increase or Returns From Deposits Will Fall As A Result of Movements in Interest Rates"
liquidity problems and even threaten the very existence of a company. How will you
reduce the risks and avoid fluctuations in earnings? What are the mitigations?
Poor risk management, it is clear, can cause serious problems for companies.
Interest rate risk can result in a decrease in future cash flows, generate liquidity issues,
and even jeopardize a company's existence. This has become an increasing challenge
for companies as financial markets have become more globalized. Companies must
measure and manage these risks in order to mitigate them and avoid unwanted income
changes. Companies must manage interest rate risk, according to a survey study
conducted by von Gerich and Karjalainen, in order to minimize revenue volatility and
increase interest income. According to their research, a rise in interest rates had a
negative impact on the majority of the companies. According to Bodnar, the great
majority of non-financial companies in the United States that employ derivatives for risk
management utilize some form of interest rate derivative.
Treasury departments benefit from the repricing model because they often have
limited trading activity and are hence less concerned with market value changes. It's
also a simple notion to understand and express to higher management. However, as
this study has demonstrated, determining appropriate time buckets can be difficult and
might lead to a poor understanding of genuine interest rate risk exposure. Duration
analysis could also be a good option because it can be applied in a variety of ways. It
can be utilized as a single risk management metric and can provide both indicative and
direct interest rate risk measurements. Duration analysis, on the other hand, monitors
changes in market value, which treasury departments may be less concerned with for
the reasons stated previously. Stress testing is a suitable alternative as a measurement
approach since it predicts the genuine direct impact of interest rate shocks on a
portfolio. However, treasury departments may find it difficult to forecast interest rate
changes in the future. Furthermore, stress testing does not provide methods for
managing and controlling interest rate risk.