The Basle Committee for Banking Supervision defines interest rate risk as a level of a bank´s financial position exposure due to unfavorable interest rate changes in the market. The bank´s financial position becomes endangered as, due to market interest rates deviation expected net interest income cannot be realized. One way to measure such a risk is the analysis of an interest rate gap, i.e. a difference between the value of assets vulnerable to interest rate changes and liabilities sensitive to changes in interest rates in specific time ranges.

Assets (liabilities) vulnerable to interest rate changes refer to those assets (liabilities) where related interest income (interest expense) are correlated with interest rate changes in agreed time ranges. Interest rate changes affect not only instruments with floating or roll-over interest rate, but also fixed rate instruments.

In order to estimate interest rate mismatch with the use of the gap method, time ranges should be identified and vulnerable assets and liabilities attributed to such time ranges taking into account time, as close as possible, of the potential revaluation of an individual balance sheet item. Findings of such a matching may prove that a bank maintains long position in a selected time range, exposing it to a risk of interest rates decrease; short position, exposing it to a risk of interest rates increase; or neutral position with no interest rate risk.

In the analysis of interest rate mismatch sometimes so called cumulative gap, also referred to as "cumulative position", is set, which represents a sum of gaps related to individual ranges. The summing may also be made from the beginning to the end, i.e. from nearest to most distant time range, or from the end to the beginning. Findings interpretation depends on the method applied.

Gap management may be of an offensive or defensive nature. In case of the offensive strategy, the bank´s management, based on interest rate prognosis, opens a position to obtain an additional income. The strategy of keeping a closed position is a defensive strategy.

Since the traditional gap method may lead to misleading conclusions, as individual instruments related to assets and liabilities operations have different rate elasticity, the gap is standardized. The standardization consists in multiplying respective assets and liabilities amounts subject to revaluation in a certain range by the ratios of relative interest rate changes. The ratios are relations of changes (flows) in interest rates on any on-balance-sheet instrument to changes in interest rates of a selected base instrument (base interest rate).

Most popular measures of protection against interest rate risk used in developed financial markets, that may be used in case the gap method is applied, may be broken down into two groups:

1. on-balance-sheet items steering;
2. off-balance-sheet hedging transactions.

Until quite recently, the Polish financial market used not to offer off-balance-sheet instruments to provide for an effective protection against interest rate risk. A couple of years ago, BRE FRA contracts (at present also BRE IRS and BRE IRO contracts) as well as caps and floors options offered by Polski Bank Rozwoju SA and Polski Bank Inwestycyjny SA were introduced in OTC market. However, these contracts are used to eliminate risk by non-banks only. Based on the experience of industrialized countries, it may be assumed that access to hedging instruments related to interest rate risk by all market participants, including banks, will be provided only when futures exchanges start functioning in Poland. For the development of derivatives market it should be more important that the issue has been covered by the new Foreign Exchange Law binding since 12 January 1999.