CORPORATE FINANCE - INTEREST RATE RISK MANAGEMENT WITH STANDARD OVER-THE-COUNTER DERIVATIVES

Purpose - Interest rate risk is one of the external risks every company is faced with. With a thematic priority on the management of the liability side, the paper aims to give an academically profound overview over plain vanilla over-the-counter derivatives which allow the pro-active management of this market risk. Design/methodology/approach - The paper introduces possibilities of corporate finance in combination with derivative instruments. In doing so, it provides an overview which distinguishes between money market and capital market maturities on the one hand, and between premium free solutions and instruments subject to premium payment on the other hand. Findings - The pro-active management of interest rate risk is appropriate to reduce the randomness of interest expenditures and delivers possibilities to increase the business success. In the light of these findings, corporate finance management could be well advised to actively manage interest rate risk by using interest rate risk derivatives. Research limitations - Derivatives with more complicated payoffs, so-called exotic options, as well as derivatives dealt on stock exchanges are not covered by this paper. Originality/value - Derivative interest rate risk management solutions are often described as risk enhancing speculative instruments. By giving a systematic and academically profound overview, the paper aims to provide a basic interest risk management compendium to academics, students and practitioners.