Interest Rate Risk

Where credit is made available in support of an export sale or contracting operation a double interest rate risk exists. On the one hand the financier faces a risk that interest receivable from a borrower or obligor may not cover his or her own funding costs. This would be a greater risk where the interest due was at fixed rate and the financier was funding his or her own lending with floating rate money. The second risk is that the borrower or obligor is faced with higher interest costs than those budgeted for and cannot afford to pay. This could occur where funding was made available at floating rates which have risen during the period of the credit arrangement.