ABSTRACT
Interest rate risk is subdivided into four different types: net interest risk, spread risk, volatility risk, and basis risk. Risk in general may be considered as any variation in expected outcome measured against an expected level. Treasury departments manage primarily financial risk and the two major types of financial risk called currency risk and interest rate risk. The components to take into account in measuring interest rate risk are the principal sums involved and the possible range of future interest rates. The principal sums involved will be obtained from cash flow forecasts. Once interest rate risk has been identified and measured, it needs to be accepted or managed. Such management can only occur if there is a clear policy setting out the board or owner's intentions. For businesses operating within tight financial constraints and uncertain cash projections, the exposure to interest rate risk can prove the final straw.
