The Effectiveness of Interest Rate Swaps - Dissertation Example

In order to operate in an effective manner, the banks need to manage their assets and liabilities from the various risks prevailing in the economy, one of which is the interest rate risk. Interest rate risk is the risk to earnings or capital arising from the movement of interest rates. The need to manage the interest rate risk is very crucial for any bank, and it has generally been observed that interest rate risk management form an integral part of the risk management policies of all major global banks.

This dissertation analyzes the effectiveness of “interest rate swaps” in managing the interest rate risk faced by the UK banks and also how these derivatives product improves the financial outlook of these banks. For the purpose of conducting the study, a quantitative and qualitative analysis was conducted on a sample of 12 major UK based banks. Through this analysis, the conclusion is drawn that interest rate swaps are quite an effective hedging tool for the management of the interest rate risk and also for improving the financial outlook of a bank.

Problem Statement In the global conventional economic environment, it would be quite interesting to evaluate the usage of the interest rate swaps by the financial institutions of the UK, particularly multinational banks. In this study, 12 major banks of the UK are selected and through both qualitative and quantitative research, the effectiveness of interest rate swaps is evaluated in managing and curtailing the financial risk. Research aim and objective The association between the derivatives products and financial risk management is quite substantial and significant.

The purpose of this paper is to conduct research on the basis of an expected analytical outcome, based on qualitative and quantitative analysis of the financial statements of UK banks, that how they have implemented the interest rate swaps in their risk management strategy. In this dissertation proposal, the aims and objectives are as follows: To clarify the influencing impact that the interest rate swaps in the global financial market in terms of managing and curtailing risk. Through quantitative and qualitative research and analysis, evaluate how giant UK banks are safeguarding their risk of being exposed to interest rate fluctuation in both the local and international financial market.

Through a questionnaire, conduct an interview with the major finance personnel of these banks in order to obtain their views about the effectiveness of interest rate swaps in managing interest rate and financial risk. Research Questions Is there any significant positive association between interest rates swaps and the financial risk management process? How do interest rate swaps work in the global financial market? How effective are interest rate swaps in managing and curtailing the interest rate risk and financial risk faced by the UK banks?

Dissertation Layout, The first Chapter introduction of the dissertation, provides an introduction to risk management and how it is becoming increasingly important for companies all across the globe to apply prudent risk management policies in order to safeguard their assets and financial outlook.