INTEREST RATE AND

OPERATIONAL RISK

Presented To : Miss Kavita Shah

Presented By : Jaimik Desai
Roll No : 511
 Contents
Meaning Of Interest Rate Risk
Mitigation Of Interest Rate Risk
Meaning Of Operational Risk
Mitigation Of Operational Risk For Buyer
Mitigation Of Operational Risk For Seller
Meaning Of Interest Rate Risk

Interest rate risk is the risk borne by an interest-bearing asset,

such as a floating rate loan.
An increase in interest rate will result in buyer or seller paying
more interest for their floating rate loan.
Over the period of time interest rate have a tendency to change
which affects the expected returns from financial instruments.
 Mitigation Of Interest Rate
Risk
International investors have many different tools at their disposal to
mitigate interest rate risks, ranging from forward contracts to the shifting
of bond portfolios to take advantage of the trends.
The most popular strategies to protect against rising interest rates include:
1. Buy Interest Rate Futures Sophisticated investors can purchase
futures contracts on government bonds or interest rate futures. These trades
enable them to lock-in a certain interest rate and hedge their portfolios.
2. Sell Long-term Bonds Many individual investors hedge against
rising interest rates by selling bonds, which tend to see their prices fall as
yields rise, particularly in bonds with long maturities and low coupon rates.
3. Buy Floating-Rate or High Yield Bonds Many individual investors
also hedge against rising rates by transitioning their bond portfolios from
long-term to short-term bonds, like high yield bonds, or floating rate bonds.
 Meaning Of
Operational Risk
Operational risk means the risk of loss resulting from inadequate
or failed internal processes, people and systems or from external
events.
Operational risk is the impact of exchange rate changes on the
firms actual operations.
Therefore, the first place to consider how to manage operational
risk is to consider the operation responses due to change in
exchange rates.
Mitigation Of
Operational Risk For
Buyer
Deal with seller with sound reputation or established track record
Request for performance guarantee to avoid non-performance
risk.
Agree on more secure methods of payment such as documentary
credit or open account.
Acknowledge and respect cultural differences with the seller.
Buy and sell in same currency in order to decrease foreign
exchange risk.
Ensure sufficient insurance coverage against transit risk.
 Mitigation Of
Operational Risk For

Seller
Deal with buyer with sound reputation or an established track
record.
Engage a reputable credit agency or credit insurer to minimize
buyers insolvency or credit risk.
Engage on more secured methods of payment such as
documentary credit or advance payment.
Avoid granting excessive credit period or limit to the buyer.
Acquire sufficient knowledge in document preparation to mitigate
against documentation risk
Ensure sufficient insurance coverage against transit risk.