Interest rate is the time value of capital and the price of this special factor of production. The level of interest rate has an important impact on both macro-economy and micro-economy, and the change of interest rate is a risk for financial participants. Since 1970s, the sharp expansion of interest rate fluctuation in international financial market has led to the revolution of risk management art and science, and the demand for better tools, techniques and strategies for interest rate risk management. This demand, coupled with the rapid development of financial theory, has led to the emergence of many financial derivatives. Including new financial futures contracts, financial option contracts, interest rate swaps, upper and lower limits, collars, swaps and so on. Interest rate risk management, that is, by using these tools to lock in the future loan interest rate or loan interest rate, in order to avoid investment failure or debt repayment crisis caused by interest rate changes; In addition, these tools can also be used to speculate according to the interest rate level and obtain high returns at high risk.

(1) Financial institutions guarantee interest income through interest rate risk management.

Banks and finance companies usually borrow short-term funds and lend long-term funds, hoping to lock in the interest rate difference between long-term and short-term funds. However, the rise in interest rates will lead to a decline in interest margin income, and banks can guarantee the lowest net interest margin income as long as they lock in the highest borrowing cost by buying interest rate ceiling options. No matter how the market interest rate changes, banks can benefit: if the market interest rate rises throughout the structural period, banks can lock the borrowing cost in the interest rate ceiling option and lend at a higher interest rate; If the market interest rate falls during the whole structural period, the bank's borrowing cost will be reduced.

(b) Debt companies reduce financing costs through interest rate risk management.

For companies that mainly use fixed-rate loans, they can enjoy the benefits of interest rate fluctuations by purchasing interest rate lower limit options. When the market interest rate drops, the contingent income of the company's purchase of the lower limit option may reduce the company's borrowing cost. For companies that mainly use short-term loans, by purchasing dual-term rights, that is, the company will use the proceeds from selling the lower limit option to purchase the upper limit option, thus protecting the interest rate risk investment income to the maximum extent and reducing the financing cost.

(3) Sovereign countries reduce financing costs and improve credit ratings through interest rate risk management.

The debt of developing countries is usually linked to floating interest rates. By using interest rate swaps or interest rate cap options, floating interest rates can be converted into fixed interest rates or proceeds from selling options, so as to avoid the debtor country's strong currency being mainly used to pay interest burden instead of economic development, thus improving the country's credit rating and reducing financing costs. When developed countries issue bonds, they can buy a large number of interest rate ceiling options, and when interest rates rise, the issuing countries can obtain hedging and reduce financing costs.