Question

What is interest-rate risk? Why do banks face a significant amount of interest-rate risk? How do banks manage interest-rate risk?

Answer 1

Interest rate risk is due to the fact that returns to an investment will change due to interest rate changes.The banks face it because their loans are usually tied in fixed rate investments.The assets mature at different time than liabilities.

The banks manage it in different ways.some loans are such that interest rate varies with market.The banks also purchase shares etc which they can sell anytime to purchase new securities,by forward rate agreements,by futures,swaps,management and boards keep constant vigil on changing conditions etc etc