Jasz
VIP Contributor
Interest rates management procedures and how to achieve it
1. Interest rate risk and the interest rate sensitivity of the firm's assets
The first step in interest rate risk management is to identify the company's exposure to interest rate risk. The second step is to calculate its exposure to this risk, as shown below:
Exposure = (Interest Rate Sensitivity) × (Average Total Assets)
In order to calculate the company's exposure to interest rate risk, you first need to know how sensitive its assets are to changes in interest rates. To do this, you divide the average total assets by the interest rate sensitivity; then multiply by 100% (100% because there are no costs involved). This gives you an estimate of how much money a change in interest rates will cost or save your firm. You can then compare this amount with your current cash position and determine if it makes sense for you to reduce or increase your exposure by taking on additional risks.
1. Interest rate risk and the interest rate sensitivity of the firm's assets
The first step in interest rate risk management is to identify the company's exposure to interest rate risk. The second step is to calculate its exposure to this risk, as shown below:
Exposure = (Interest Rate Sensitivity) × (Average Total Assets)
In order to calculate the company's exposure to interest rate risk, you first need to know how sensitive its assets are to changes in interest rates. To do this, you divide the average total assets by the interest rate sensitivity; then multiply by 100% (100% because there are no costs involved). This gives you an estimate of how much money a change in interest rates will cost or save your firm. You can then compare this amount with your current cash position and determine if it makes sense for you to reduce or increase your exposure by taking on additional risks.
