Question

Mention in your own words: The methods used to reduce interest rate risk and credit risk

Answer 1

Interest rate Risk- investors can reduce their interest rate risk in the following ways: 1. Increase portfolio cash positions 2. Increase allocations to shorter maturity securities 3. Purchase floating rate securities,

Investors can reduce interest rate risk by buying bonds that mature at different dates. They also may allay the risk by hedging fixed-income investments with interest rate swaps and other instruments

Credit risk can be reduced by following the steps or actions mentioned such as a) thoroughly check a new customer’s credit record b) Use that first sale to start building the customer relationship c)Establish credit limits like Credit-agency reports which can provide comprehensive information about a company’s financial history , Bank reports, which should give details of the bank’s relationship with the company, the company’s borrowing capacity and its level of debt, Audited financial statements, which can provide a good view of the business’s liquidity, profitability and cash flow.d)Make sure the credit terms of your sales agreements are clear e) Use credit and/or political risk insurance f) Use factoring.To do this, you sell your receivable to a factoring company for its cash value, minus a discount. This gives you your money immediately because you don’t have to wait for payment—the customer will pay the factoring company instead of you g) Develop a standard process for handling overdue accounts