Interest Rate and Currency Swaps Chapter 9 Interest Rate and Currency Swaps

Interest Rate Risk All firms – domestic or multinational, small or large, leveraged, or unleveraged – are sensitive to interest rate movements in one way or another. The single largest interest rate risk of the nonfinancial firm (our focus in this discussion) is debt service; the multicurrency dimension of interest rate risk for the MNE is of serious concern. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

Management of Interest Rate Risk The second most prevalent source of interest rate risk for the MNE lies in its holdings of interest-sensitive securities. Unlike debt, which is recorded on the right-hand side of the firm’s balance sheet, the marketable securities portfolio of the firm appears on the left-hand side. Marketable securities represent potential earnings for the firm. Copyright © 2007 Pearson Addison-Wesley. All rights reserved.