Print this Page
Interest Rate Risk Management
WHAT IS INTEREST RATE RISK MANAGEMENT?
Interest rate risk management is the process of converting an unacceptable risk to an acceptable risk. A known worst-case interest rate will help you with cash flow planning, budgets and credit applications.
Case Study:
Customer:
You need funding for the acquisition of commercial property units for rent.
Risk profile:
You wish to minimise the risk of being exposed to rise in interest rates. But you want to benefit from the current low interest rate environment, while Libor remains below the longer dated Swaps.
Rate outlook:
The market perceives that short term interest rates( 3 month Libor) are moving higher, while longer dated swaps are trading in a range between 5.00 - 5.50%
Debt level: 10,000,000
Repayment: Quarterly
Term: 10 Years
Lump sums/ Amortisation: Bullet repayment i.e. interest only.
You need the flexibility to make early repayments up to 2,000,000 over the 10-year term.
Budget rate:
Cost of funds of 6% or less is required to remain viable. If rates move above 6%, the investment would need additional funding and would need to be reviewed.
These are alternatives to consider - click to see the benefits and risks.
By adopting a portfolio approach you are able to protect 80% of the portfolio from rising interest rates, while allowing 60% of the portfolio to benefit from the current low interest rate environment thereby satisfying the clients original requirements.
Every client is different. So it is important to ensure that you get the right portfolio mix of protection and flexibility. The following three questions help determine this;
- What is your risk profile
- What is your view on interest rates
- How sensitive are you to a move in interest rates.
Contact our UK Corporate Treasury Services team for more details on how we can benefit you.
So far as the law and the FSA Rules allow, Anglo Irish Bank PLC ("the Bank") disclaims any warranty or representation as to the accuracy or reliability of the information and statements in this Product Profile. The Bank on its contents but should make their own assessment and seek professional advice relevant to their circumstances. The Bank may have proprietary positions in the products described in this Product Profile.
This Product Profile is for information purposes only, is not intended as an offer or solicitation, nor is it the intention of the Bank to create legal relations on the basis of the information contained in it. No part of this Product Profile will not be liable (whether in negligence or otherwise) for any loss or damage suffered from relying on this Product Profile. This Product Profile does not purport to contain all relevant information. Recipients should not rely may be reproduced without the prior permission of the Bank. Issued by Anglo Irish Bank PLC, 10 Old Jewry, London.