w10 interest rate risk

What is interest rate risk?

The risk of financial loss due to fluctuations in interest rates affecting assets, liabilities, or investment returns.

What are the main factors affecting interest rate risk?

• Supply and demand for money,

• economic growth,

• inflation,

• monetary policy,

• global liquidity,

• uncertainties.

What is SONIA?

Sterling Overnight Index Average – the UK's benchmark interest rate for overnight unsecured transactions in sterling, replacing LIBOR.

What is the difference between SONIA and LIBOR?

SONIA is a backward-looking overnight rate, while LIBOR was a forward-looking term rate based on estimates.

What is Net Interest Income (NII)?

The difference between interest earned on assets and interest paid on liabilities.

NII Formula:

(Interest Rate on Assets−Interest Rate on Liabilities)×Total Principal

What is a FRA?

An over-the-counter contract to lock in an interest rate for a future period.

Settlement Calculation Formula:

Settlement=(Contract Rate−Actual Rate)× (Notional Amount×Days​ / 365 )

What are Interest Rate Futures?

Standardised contracts to buy or sell a financial instrument at a future date at a set interest rate.

Number of Contracts Calculation:

Total amount / contract size

What are Interest Rate Swaps?

Agreements to exchange fixed-rate payments for floating-rate payments or vice versa.

Net Benefit Calculation Formula:

(Floating Rate−Fixed Rate)×Debt Amount

What are Interest Rate Caps and Floors?

Caps limit the maximum borrowing cost; Floors provide a minimum return on investments