Investors can reduce interest rate risk with forward contracts, interest rate swaps and futures. Investors may desire reduced interest rate risk to reduce uncertainty of changing rates affecting the value of their investments. This risk is greater for investors in bonds, real estate investment trusts (REITs) and other stocks in which dividends make up a healthy portion of cash flows.
Primarily, investors are concerned about interest rate risk when they are worried about inflationary pressures, excessive government spending or an unstable currency. All of these factors have the ability to lead to higher inflation, which results in higher interest rates. Higher interest rates are particularly deleterious for fixed income, as the cash flows erode in value.
Forward contracts are agreements between two parties with one party paying the other to lock in an interest rate for an extended period of time. This is a prudent move when interest rates are favorable. Of course, an adverse effect is the company cannot take advantage of further declines in interest rates. An example of this is homeowners taking advantage of low interest rates by refinancing their mortgages. Others may switch from adjustable rate mortgages to fixed rate mortgages as well.
Interest rate swaps are agreements between two parties in which they agree to pay each other the difference between fixed interest rates and floating interest rates. Basically, one party takes on the interest rate risk and is compensated for doing so.
Futures are similar to forward contracts and interest rate swaps, except there is an intermediary. This makes the arrangement more expensive but there is less chance of one party failing to meet obligations. This is the most liquid option for investors.

Can individual investors profit from interest rate swaps?
Find out how individual investors can speculate on interest rate movements through interest rate swaps by trading fixed rate ... Read Answer >> 
How do companies benefit from interest rate and currency swaps?
An interest rate swap involves the exchange of cash flows between two parties based on interest payments for a particular ... Read Answer >> 
What are interest rate swaps on the OTC market?
Learn about interest rate swaps and how they are traded over the counter, and understand the impact of DoddFrank on swaps ... Read Answer >> 
What does a climbing interest rate risk signify about the economy?
Learn what a climbing interest rate risk signifies for the economy. Interest rate risk is heightened with inflationary pressures ... Read Answer >> 
Do interest rate swaps trade on the open market?
Learn how interest rate swaps are traded on the OTC and interbank markets, and how these swaps can be used to arbitrage different ... Read Answer >>

Trading
Managing Interest Rate Risk
Interest rate risk stems from the possibility that an interestbearing asset’s value will change due to changing interest rates. 
Trading
How Are Interest Rate Swaps Valued?
When trading in financial markets, higher returns are generally associated with higher risk. Hedge your risk with interest rate swaps. 
Investing
How Do Interest Rates Affect the Stock Market?
Interest rates can have a complicated ripple effect through financial markets. Here's what you need to know. 
Trading
An Introduction To Swaps
Learn how these derivatives work and how companies can benefit from them. 
Trading
Interest Rate Swaps Explained
Plain interest rate swaps that enable the parties involved to exchange fixed and floating cash flows. 
Investing
How To Read Interest Rate Swap Quotes
Puzzled by interest rate swap quotes terminology? Investopedia explains how to read the interest rate swap quotes 
Trading
Hedging With Currency Swaps
The wrong currency movement can crush positive portfolio returns. Find out how to hedge against it. 
Managing Wealth
An InDepth Look at The Swap Market
The swap market plays an important role in the global financial marketplace; find out what you need to know about it. 
Insights
How the Federal Reserve Affects Individual Investors
The Federal Reserve's decision on interest rates affects the whole economy. 
Investing
How Interest Rates Affect Mutual Funds
Find out how changing interest rates impact mutual funds, including bond and money market funds, and how higher rates can discourage investors.

Delayed Rate Setting Swap
An exchange of cash flows, one of which is based on a fixed interest ... 
Bond Market Association (BMA) Swap
A type of swap arrangement in which two parties agree to exchange ... 
InterestRate Derivative
A financial instrument based on an underlying financial security ... 
Liability Swap
An exchange of debt related interest rates between two parties ... 
Fixed Interest Rate
An interest rate on a liability, such as a loan or mortgage, ... 
Interest Rate Swap
An agreement between two parties (known as counterparties) where ...