Chapter 8 - Interest rate risk Flashcards Preview

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Flashcards in Chapter 8 - Interest rate risk Deck (3)
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1
Q

Financial risks realted to borrowing

A
  • Renewal risk - can’t finance at redemption date (go elsewhere - higher interest or sale/leaseback)
  • Gearing risk - free cashflows insufficient to service debt
  • Interest rate risk - increase erodes profit, decrease increases F.V. of financial instruments
2
Q

Internal interest rate risk management

A
  • No debt - capital structure purely equity
  • Fixed rate debt
  • Smoothing - balanced mix fixed/variable rate
  • Matching - assets/liabilities both fixed or variable
  • Netting
3
Q

Futures

A

Fixed rate, standard size

  • Initial margin - deposit to exchange when taking out futures contract
  • Variation margin - if losses incurred, additional funds will need to be deposited