Let's take a look at how interest rate risk plays a role in interest rate swaps. When a company or investor enters into an interest rate swap, they are exposed to changes in interest rates, and this exposure differs depending on whether they're paying or receiving a fixed rate. For example, consider a two year US dollar overnight index swap, or OIS, with a fixed rate of 3.75% against SOFR paid annually. Let's see how this swap would work for both a fixed rate receiver and a fixed rate payer. First, let's consider the fixed rate receiver. In this case, the party receives a fixed payment of 3.75% annually and pays a floating rate based on SOFR. This position benefits from a decline in interest rates. Why? Because as SOFR decreases, the floating payments they make go down while the fixed payments they receive remain the same at 3.75%. This leads to a net positive outcome since they're receiving a steady fixed amount, but paying less on the floating side. On the other hand, the fixed rate payer is exposed in the opposite direction. Here, the party pays the fixed rate of 3.75% and receives a floating rate based on SOFR. This position benefits from a rise in interest rates. If SOFR increases, the floating payments they receive go up while their fixed payment of 3.75% stays constant. The result is a net gain as they're locked into a fixed payment, but receive a higher floating amount. So the fixed rate payer rising rates mean higher cash inflows from the floating side of the swap.