Interest Rate Risk
Learn more about interest-rate risk at MoneySwitch.
This is the risk that arises when the level of interest rate fluctuates. Although the lenders pay a fixed interest rate, the effective interest rate achieved by lenders is dependent on the utilisation of the liquidity pool. Therefore, asset suppliers have no guarantee what interest will be earned on their assets when those assets are initially deposited. Keeping the utilisation rate of the liquidity pool high and stable will reduce interest rate risk. As mentioned previously, there is a natural incentive to keep utilisation at an optimal level, which will help mitigate interest rate risk.