- Interest Rate Risk: This risk is applicable primarily to fixed income securities. It refers to the risk of the interest rates changing in an undesired direction, which may cause the prices of the security to decline. In periods of rate increases, the variable interest rate payer is adversely affected since payment of higher interest rates would be needed. On the other hand, if interest rate increases, the variable rate receiver would benefit since rise in increase rates would lead to higher receipts due to high interest receivables. While the interest rate increase is positive for one party, it is negative for the counterparty to the transaction. This is the guiding principle of risk management which aims to achieve mitigation of the effects of different risks so that they nullify the effect of each other and minimize the downside variability of the returns and cash flows.