Interest Rate Risk Management
Banks use derivative products mainly to manage interest rate
risk; the increased volatility of interest rates has made the need
for accurate measurement and control of interest rate risk par-
Katerina Simons (1995, 24)
In the late 1980s, economists at the Olympic Bank, a major Greek bank, grew concerned about another problem, the rising government deficits and the prospect of higher short-term, medium-term, and long-term interest rates, which, if materialized, could have a negative impact on both the bank balance sheet and operations statement. In particular, bank economists were concerned about a large portion of the bank's fixed rate portfolio financed by floating rate funds borrowed in the interbank market.
Olympic Bank is not alone. In a deregulated economy, every bank and every financial institution is concerned with interest rate fluctuations. Higher interest rates, for instance, have a negative impact on banks as borrowers of funds at floating rates, such as money market accounts, short maturity CDs, banker's acceptances. In