INTEREST RATE RISK MANAGEMENT
Managing financial risk is a core activity of most businesses. Proper analysis, quantification, and understanding of the inherent risk is key to appropriate management. Managing interest rate risk can make or break the success of a project. Unfortunately, hedging interest rate risk is frequently a last-minute consideration before the loan closes, and exposes the borrower to unnecessary risks with real economic impact.
Derivative Logic knows a dynamic and ongoing hedging strategy best protects our clients while providing the greatest financing flexibility at a low cost. We provide extensive, unbiased analysis and a menu of hedging choices so borrowers can make informed decisions. Lenders often withhold some hedging options. Having independent, unbiased analysis ensures finding the most effective hedge available.
Interest rates are in constant flux and having flexibility is critical to adapting and capitalizing to these changes. Whether you’re seeking to satisfy a mandatory hedging requirement from your lender, evaluating a refinancing opportunity or overseeing a portfolio of loans or bonds, every basis point has an economic impact, and we make sure to protect your interests. Some of the hedging products we help you utilize:
SWAPS
The suite of products available to protect against interest rate risk is expansive. Swaps are the most commonly used hedging instruments typically offered by banks. They work best when used to hedge long-term financings of five years or more. Whether your interest rate exposure lies with the movement of LIBOR or Prime, a swap is a separate contract from the loan and confers significant hedge customization outside the parameters of the financing.
CAPS
Interest Rate Caps are often required hedges for variable rate loans, including many popular Fannie Mae and Freddie Mac loan programs, or short-term bridge financing. Other borrowers may elect to use an interest rate cap to hedge all or a portion of its interest rate risk associated with variable rate loans or bonds.
Derivative Logic’s Interest Rate Cap Bidding and Advisory Practice allows borrowers to access a comprehensive service offering, resulting in a borrower’s efficient execution of interest rate caps, vetted and credit acceptable bank counterparties, including pre-bid required Anti-Money Laundering documentation, Dodd-Frank bilateral agreements or compliance using the ISDA Dodd-Frank Protocol Agreements.
SWAPTIONS
We often get asked how to hedge a refinancing of a term loan due in 1-3 years. Many real estate borrowers have vivid memories of locking fixed rates to permanent financing rates after the construction period. Unfortunately, most them didn’t get the advice to purchase a swaption. A swaption is the right, but not the obligation to enter into a swap. The option doesn’t require the hedger to enter into a swap with a particular bank. Most swaptions are cash settled, and either expire worthless or pay the hedger the PV of the positive rate differential of the contract and the then-current swap rate. Swaptions can be customized to correspond with future financing expectations. A purchased swaption is an asset and will never have a negative value.