Interest Rate Risk Hedging interest rate risks

Do not let the historically low interest levels pass. Hedge your interest rate risks now

Until recently it was believed any rate hikes would not present themselves before 2020. However, they are currently expected to occur in 2018. This means that the current low 5 and 10-year swap interest rates will rise and can shortly no longer be fixed. The recent bottom in the rates will not reoccur. More and more organisations are deciding to hedge their risks on a long-term basis.

What do you need to consider when hedging your interest rate risks?

A fitting interest hedge is always a tailor-made solution. You will have to decide what percentage of your interest exposure you want to hedge, for how long and with what instrument. After all, you do not want to impose an unnecessary restriction on the flexibility of your organisation nor create an overhedge. Besides the regular ‘plain vanilla’ interest rate swaps, there may be other instruments which are suitable for hedging your interest rate risks.

Examples include:

  • Interest rate caps;
  • Interest rate collars;
  • Participating swaps;
  • Forward-starting swaps.

All these instruments have their benefits and drawbacks. We are happy to help you assess which instrument is the most suitable to manage the interest rate risk of your organisation.

Negotiate with knowledge of the facts

If you are ultimately going to conclude an interest rate derivative to hedge your interest rate risk, you will be dealing with complex and non-transparent pricing of these instruments. The interest rate you pay will be too high if you do not obtain advice. The revenues of a bank consist of a number of basis points – set by the bank itself – times the principal sum times the term. This adds up, and margins of many tens of thousands to hundreds of thousands of euros per interest rate swap transaction are the result. ICC checks, negotiates and improves the pricing of the bank, so that you can achieve considerable savings on your interest charges.

Request the white paper ‘Hidden bank margins in interest rate swaps’ to obtain a better understanding of how your bank earns money from the sale of interest rate swaps. Of course, you can also contact us without any obligation if you are considering concluding or restructuring an interest rate swap.