What is Interest Rate Risk?
Interest rate risk is the exposure to financial losses caused by movements in market interest rates. It affects floating-rate borrowers (higher rates raise debt costs), fixed-rate bondholders (rising rates depress bond prices), banks (asset-liability mismatch), and any business with rate-sensitive cash flows or asset values.
How It Works
- Identify rate-sensitive assets, liabilities, and contractual cash flows.
- Measure gap or duration to quantify sensitivity to rate moves.
- Hedge with interest rate swaps, caps, floors, or fixed-to-float conversion.
- Apply IFRS 9 hedge accounting to align P&L treatment of hedge and hedged item.
- Stress-test the portfolio under parallel and non-parallel rate shocks.
Saudi Context
Saudi banks face the dominant interest rate risk through SAIBOR-linked loans and deposit pricing. Since the SAR is pegged to USD, SAMA’s policy rate tracks the US Federal Reserve closely. Saudi corporates with sukuk and term loans manage interest rate risk through fixed-rate issuance, floating-to-fixed swaps, and natural hedging by matching debt to revenue currencies and durations.
Example
A company holds SAR 500 million of floating-rate debt indexed to SAIBOR + 1.5%. A 100 basis point rise in SAIBOR increases annual interest cost by SAR 5 million. The company enters a pay-fixed, receive-floating interest rate swap on SAR 300 million, locking in the rate on 60% of its exposure.