The decision between hedging and positioning, i.e. between a hedged interest situation and a deli be ratelyassumed interest-rate risk, is also an expression of the philosophy of a company’s treasury department:nThe argument in favour of employing a hedging strategy is that management can concentrate all its attentionon managing the performance-oriented cash flows, market trends and the company strategy, becausethere is no further need to manage positioning decisions.nA pure hedging strategy, however, may also result in competitive disadvantages, if competitors engage inactive interest-rate management and manage to reduce their interest expense by means of their positioningdecisions. The positioning, i.e. an active stance towards the interest-rate risk, therefore forms an importantstep in turning the financial area into a profit centre.INTEREST-RATE CURVESThe interest-rate structure curve and the interest payment curve it implies form a basis for decisions regardinginterest-rate management.nThe interest-rate structure curve is the graphic representation of the correlation of interest rates – in thecase of instruments with equal credit risk – dependent on the term to maturity. Interest-rate structurecurves reflect the anticipative attitude of the most active professional market players.nThe most important conclusion to be taken from the interest-rate structure curve is how the impliedinterest payment curve is derived. It is the future interest rate expected by the market, i.e. by theprofessional players in the market. This implied future interest rateand thus the implied interest paymentcurve can be calculated on the basis of the interest structure curve.Which forward rate is used for the decision is dependent upon the respective situation.ExampleWhen comparing a floating interest loan (6 month EURIBOR) with a fixed interest-rate loan, therespective 6 month forward rates are relevant. Therefore, the 2-/2 1 /2 year forward interest rateexplains market expectations with regard to the level of the 6 month ratein 2 years.If after 12 months, however, a decision has to be made on a 5-year fixed interest financing, its interestrate can either be hedged today through a forward swap or financed in 12 months at the current rate.The “1+5” annual rate tells how much – according to the expectation of the market – the rate will bein 12 months for a 5 year swap.6