Slide MGT411 Slide06

Chapter 9
Interest Rate and
Currency Swaps

Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

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.

1-2

Management of Interest Rate

Risk
• The second most prevalent source of interest rate
risk for the MNE lies in its holdings of interestsensitive 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 lefthand side.
• Marketable securities represent potential earnings
for the firm.
Copyright © 2007 Pearson Addison-Wesley. All rights reserved.

1-3