Interest rate risk

banking

The interest rate risk is the risk assumed, derived from changes, as well as volatilities, suffered by the interest rates of assets and liabilities. Which may have a direct impact on economic and financial agents.

When it comes to interest rate risk, it is related to the negative attitude or drift that a change in interest rates may represent for the interests and intentions of organizations and individuals that act in the market. This risk can be negative or positive depending on the side of the market that we are as well as the position that we have against an asset or liability.

Case example for and against

For example, an upward change in interest rates will be detrimental to someone who has money on credit, be it a loan or a mortgage, since they will have to pay a higher price for this money.

While a person who has investments in deposits and other elements of fixed income, such as public debt and the like, will gain from the rise in interest rates, by paying a higher amount.

Conversely, the opposite situation would occur if the direction of the rise or fall of the rates and the interest of the agents change.

How to counter interest rate risk

To face a possible risk in interest rates that affect in any way our objectives and assignments, we can choose several ways:

  • Contract a fixed interest rate: it is usually higher than the variable interest rate at the time of contracting but it also provides more security in terms of changes, since they will not affect us, and in the case of a rise above the fixed interest rate, we will keep our contracts below the official rate.
  • Counteracting the effects of possible rate hikes from the other side: For example, investing in financial products that rents us more money in the event of rate hikes, thus partially deactivating the negative effects of hikes.
Credit risk

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