Alternative Ways of Interest Rate Risk Management and their Effectiveness on Small and Medium Enterprises in Lithuania

Global financial crisis has exposed borrowers to substantially increased interest rate risk and motivated them to search for ways to insure against it. Unfortunately, small and medium enterprises (SMEs) often do not have access to interest rate derivatives, which leaves the question: how can Lithuanian SMEs manage their interest rate risk? The objective of this paper is to devise alternative interest rate risk management instruments and test their effectiveness on SMEs. Firstly, overall market situation is explored to investigate current challenges in interest rate risk management. Secondly, interest rate derivatives are analysed to assess their applicability to SMEs. Thirdly, non-derivative instruments to manage interest rate risk are introduced. Eventually, these models are tested on a sample of real-life SMEs, so as to evaluate their effectiveness. The paper relies on analysis of academic literature and secondary data for the first task and employs modeling for the remaining tasks. The analysis has identified alternative tools that Lithuanian SMEs may effectively use to fix, minimize or postpone their interest payments. These tools are mainly based on utilization of spreads between different interest rates and utilization of other credit facilities. Nevertheless, non-financial factors play an equally important role in applicability of these tools.