Interest rate risk hedging

Interest rate risk is a possibility for financial loss from unfavourable movements in interest rates, which may result higher costs of outstanding loans or lower interest income from invested assets.

Most common financial instruments:

  • Interest Rate Swap - an agreement between counterparties to exchange cash flows from floating interest payments to fixed payments over a specific future period.

  • Interest Rate Cap - an agreement to protect against rise in floating interest rate (Euribor) over agreed rate level (cap).

  • Structured Deal - an agreement consisting of several financial instruments to hedge interest rate risk customised for company’s specific needs.

Example

Company has a 10 year investment loan with a floating interest rate based on 6 months Euribor. Due to Euribor fluctuation the interest payments have been unpredictable making it difficult for the company to plan its cash flows. To hedge against interest rate payments’ fluctuations the company agrees an Interest Rate Swap deal with the bank to fix interest payments until the end of underlying loan agreement.

Swedbank offers variety of financial instruments for interest rate risk hedging. In order to find the best solution please contact Swedbank Markets specialists.

Ask our specialist