Interest rate risk management

Interest is the (market) price for money lent. If a company borrows money from a bank at a fixed interest rate, the calculation of the debt interest for a fixed period is simple and the risk of suffering losses due to changes in interest rates remains with the creditor of the debt.


At first glance, therefore, floating interest rates, where the interest rate on the money borrowed changes over time, may appear more favourable. For short-term financing, a company may be able to accept small increases in interest rates, but for long-term investments no one wants costs to get out of hand.


If agreeing on a fixed interest rate for the planned period is too expensive, fluctuations in interest rates can be reduced or even compensated for by various hedging instruments. Interest rate swaps are common, for example, in which variable interest payments are exchanged for fixed ones without having to change the original financing.


Similar to foreign exchange management, interest rate hedging transactions are concluded with banks or other counterparties in accordance with corporate policy requirements. In addition to the pure transaction costs of the interest rate derivative, its suitability in terms of matching maturities and volumes, the risk of default by the counterparty and other aspects must be considered.


A Treasury Management System supports the Corporate Treasury Manager in identifying interest rate risks, valuating and hedging them, ongoing monitoring and documentation. The goal of his actions is usually to minimise losses due to interest rate fluctuations by concluding suitable hedging transactions at low transaction costs.


Ähnlich dem Devisenmanagement werden Zins-Sicherungsgeschäfte mit Banken oder anderen Kontrahenten nach Maßgabe der unternehmenspolitischen Vorgaben geschlossen. Neben den reinen Transaktionskosten des Zinsderivats sind dessen Eignung hinsichtlich Laufzeiten- und Volumenkongruenz, der Gefahr eines Ausfalls des Kontrahenten und weiterer Aspekte zu betrachten.


Das Treasury Management System unterstützt den Corporate Treasury Manager bei der Identifizierung der Zinsrisiken, deren Absicherung, der laufenden Überwachung und Dokumentation. Ziel seiner Handlungen ist i.d.R. ein möglichst geringer Verlust infolge von  Zinsschwankungen durch Abschluss passender Sicherungsgeschäfte bei niedrigen Transaktionskosten.

Trinity TMS Functions at a Glance

  • Overview of the company-wide interest rate risks and hedges
  • Recording, mapping of interest rate derivatives (e.g. swaps, caps, floors, forward rate agreements, swaptions, cross currency swaps)
  • Automatically imported and historized interest rates and yield curves
  • Separation of front/(middle)/back office, dual control principle
  • Centralised interest rate risk management possible
  • Maturity Calendar
  • Extended documentation by attaching documents or link to DMS
  • Definition of trader, currency, risk of loss-related limits
  • Settlement via defined standing instructions
  • Automatic account assignment and posting of cash flows and valuations


Maximum Transparency and Risk Reduction

  • Current reporting of company-wide interest rate risk positions
  • Optimised interest rate hedging worldwide
  • Flexible pivot analysis
  • Observations of defined limits


Revision Security

  • Traceability at all times through audit trail
  • Historization of business and market data
  • Individual authorisation profiles for users in the front/middle/back office
  • Four-eyes principle
  • Automated workflows based on predefined rules


Time and Cost Savings

  • Optimisation of hedging by avoiding over-hedging
  • Savings in transaction costs through the use of suitable interest rate derivatives



Process Optimisation

  • Straight Through Processing from the conclusion of the hedging transactions to the booking in the ERP possible

Best Practice

After a period of negative interest rates and custody fees for funds parked with banks and almost free financing, the financial market is returning to normality and the management of interest rate risks is gaining importance again. The higher a company's share of debt financing, the more important it becomes to take an analytical look at floating-rate loans in particular when interest rates are rising.


Active interest rate management plays a rather subordinate role for most corporates. This may be due to high equity ratios or a lack of freedom of choice in financing requests, especially in the SME sector. Often there is a mix of fixed and variable financing, where the risk of interest rate changes appears too low for the treasury department to specifically take care of it.


However, with increasing financing volumes and often also in connection with international expansion of the company, it is definitely worthwhile to determine the possible additional costs due to a lack of interest rate hedging and to look around for risk limitation instruments.


Instead of agreeing on a very high fixed interest rate for a long term, for example, a variable interest rate and the swapping of interest payment flows (floating for fixed) can be agreed for a certain period of time and adjusted again later.


Forward rate agreements, in which a fixed interest rate is agreed before the actual loan begins, are among the interest rate hedging instruments, as are options, in which the scope for interest rate changes is limited by compensation payments from the counterparty after certain conditions occur. Known, for example, are caps as interest rate ceilings if the underlying floating interest rate reaches a certain value within the agreed term.


Trinity TMS helps to assess interest rate risks and find suitable instruments for hedging. The instruments are recorded in the system, evaluated, monitored and analysed for their effectiveness. This can be done in a centralised manner for all companies in the group and gradually transferred to centralised financing with the transfer of intercompany loans. Trinity TMS generates interest and repayment schedules for all loans and borrowings, which can be compared to the payment schedules of the hedging derivatives. The valuation of variable loans is based on the automatically imported interest rates and yield curves and allows an ongoing review of the effectiveness of the interest rate hedge.


All cash flows from interest rate hedging transactions are immediately reflected in liquidity planning and cash management without having to be entered again. Cash flows as well as valuations can be transferred to the automatic posting in the financial accounting via the account assignment module.


Interest-rate-hedging, IR-risk, floating-interest-rate, risk-management, forward-rate-agreement, swap, cap, floor, swaption, cross-currency-swap


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