Study objectives：
To appreciate the nature of interest rate risk.
To describe internal methods of hedging interest rate exposure.
To implement and evaluate external hedging strategies.
Nature of interest rate risk
Companies have exposure to interest rates risks：
Rising interest rates
Falling interest rates
Management of interest rate risk：
Smoothing-maintaining a balance between fixed rate and floating rate borrowing.
Matching-attempting to have a common interest rate for both assets and liabilities.This is more practical for financial institutions than for trading companies.
External hedging techniques：
Forward Rate Agreements(FRAs);
OTC options-caps，floors and collars;
Interest rate futures contracts;
Options on interest rate futures;
Interest rate swaps and swaptions.
Stakeholder definition
Government regulation
Regulation includes the existence of governing bodies such as：
(a)OFWAT-water regulation
(b)Postcomm-Royal mail regulator
(c)Competition commission-takeover and merger regulator.
Other environmental and ethical issues
Government regulation
Government regulates
supply，quality and prices of certain organisations such as：
(a)Monopolies
(b)Privatised utilities
(c)State owned/run.
Regulation is designed to enforce/enhance：
(a)Competition
(b)Customer welfare
(c)Reduced public spending.
Levels of Culture
· Basic-which guides behaviour within the organisation
· Overt-expressed in the organisation and members
· Visible-style of office and dress rules etc
Organisational culture
· Values
· Attitudes
· Norms
· Expectations “
the way we do things round here” Handy
EU-The effect of EU
·Product of standard
·Environmental protection
·Monetary policy
·Research and development
·Regional policy
·Labor cost
Market conditions
Markets can be affected by government policies
but demand will also be affected by：
(a)Business cycle
(b)Overseas demand and competition.
Political climate
Political parties will have different views on，and strategies about
(a)Balance of payments
(b)Gross domestic product
(c)Acceptable inflation rates
(d)Level of interest rates
(e)Fiscal policy(income tax，corporation tax and VAT)
(f)Government spending，incentives，tariffs.
Businesses that supply the government may suffer uncontrollable changes in demand i f the political climate changes.
Legal factor
- Employment law
- Marketing and sales
- Environment
- Regulators
Funding
- Private sector organisations obtain finance from both debt and equity.Rational invest ors should invest in companies that will be able to provide an acceptable return on their i nvestments.
- Public sector organisations have less control over the funding they obtain.Local cou ncils may be capped over the amount of finance they can raise or the sources of finance can they obtain.
They may also have to provide free services to fulfill their social objectives.
Economic environment
- Gross domestic product
- Local economic trends
- Inflation
- Interest rates
- Exchange rates
- Government fiscal policy
- Government spending
- Business cycle
- International factor
What should a company consider when planning & assessing performance?
·Culture
·Economics
·Competitive forces
·Politics
·Technology
·Funding
·Legal factors
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