Interest Rate Risk Management

Interest rate risk management is a subset of treasury risk management that focuses on measuring and mitigating the risk of reduced business earnings due to changes in interest rates. If this risk persists in the long term, it may also impact a business’s capital.

Central banks set interest rates, which influence borrowing costs for businesses. Higher interest rates increase financing expenses, which can reduce profitability, whether a business sells goods or provides services.

Managing Interest Rate Risk

Effectively managing interest rate risk requires analyzing how interest rate fluctuations affect your financial obligations. Businesses should assess the additional costs incurred when interest rates rise on loans and other rate-sensitive liabilities and compare these costs to the revenues generated from activities funded by those liabilities.

Additionally, simulating different interest rate scenarios can help businesses understand their potential impact on profitability and capital. By doing so, companies can proactively adjust their financial strategies to mitigate risk.

Do you need help assessing how interest rate changes could impact your business?

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