How to Develop an Interest Rate Risk Management Policy

Stanley Myint and Fabrice Famery

In this chapter, we introduce several important qualitative aspects of an interest rate risk management policy. There are a large number of choices to be made in defining such a policy, and most companies formalise them in a risk management policy document. This document should provide a balance between operational freedom and company oversight and control. To achieve this, it has to specify the risk management parameters in sufficient detail that it protects the company against unauthorised use of derivatives while not paralysing the Treasury department, which has to implement the policy often quickly and in volatile market conditions. The main areas of any risk management policy document are:

• • the risks that should be hedged and how;

• • roles and responsibilities for various risk management functions (who does what);

• • authorised derivative instruments;

• • limits on the use of derivatives; and

• • reporting requirements and when to deviate from the policy.

BACKGROUND

A European media company, Media Corporation, is seeking to grow through acquisition. The company’s policy has historically been to grow