Interest rate risk
You'll learn to identify and manage the two main types of interest rate risk: gap exposure, which occurs when asset and funding maturities don't match, and basis risk, where deposit and loan rates move differently.
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In this lesson
- 0:00 Interest rate risk overview
- 0:08 Gap exposure and basic risk
- 0:40 Yield curve fundamentals
- 1:49 Inverted yield curves explained
- 2:26 Three theories of yield curve
About this lesson
This video explains how the yield curve reflects interest rate expectations and introduces three key theories—expectation theory, liquidity preference theory, and market segmentation theory—that help you understand why interest rates vary across different time periods. Understanding interest rate risk is essential for financial management and strategic decision-making in papers like FM and AFM, where you'll need to assess how rate changes affect cash flow and profitability. By mastering these concepts, you'll be able to evaluate lending and borrowing strategies and make informed decisions about matching asset and funding timelines to protect against unexpected rate movements.
Duration: 3m
Transcript
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