What is interest rate risk for a bank? How can a bank manage interest rate risk?

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Inflation in interest rates can lead to losses. This risk is a result of banks’ exposure to variable rate loans and investments as well as fluctuations in interest rates expectations. Diversifying the loan portfolio of banks across different terms and borrowers, hedge against market shifts through derivative instruments like swaps and futures contracts and setting aside reserves for potential losses due to adverse rate movements can help manage interest rates risk. In order to be prepared for changes in the economic environment, banks must closely monitor macroeconomic conditions and adjust their strategies accordingly.

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