Interest rate hedging

What is interest rate hedging?

Interest rate hedging is about limiting the effect of fluctuations in market interest rates. An interest rate increase can have major consequences for a highly leveraged company. A range of financial instruments have been developed for managing interest rate risk. The purpose of their use may be:

• To hedge against interest rate fluctuations
• To adapt the loan portfolio to expectations about future interest rate developments

Most hedging products are flexible as they are linked "on top of" already existing loan agreements or other interest-bearing balance sheet items. The original loan agreement is not affected and the financing can come from any loan source. The hedging products can easily be tailored to the individual customer's needs.

Why hedge interest rates?

Changes in the Norwegian economy and international interest rates affect Norwegian interest rate levels. Norwegian companies' results are directly affected by changes in the interest rate level, and it is therefore important to manage the effects of them.

More predictable cash flows

Predictability in cash flows has become increasingly important for the board and owners of companies. As a result of this, the demand and requirements for us as advisers on interest rate management have increased significantly. DNB Carnegie possesses broad expertise in risk management of loan portfolios. The use of various types of interest rate derivatives has increased in line with the need for risk management. There are now almost unlimited opportunities to manage risk with different products and combinations of these.

Our advisers can set up an interest rate strategy

Our experienced advisers help you design and implement an interest rate hedging strategy. We also offer assistance with the day-to-day management of your company's interest rate and currency exposure. With good risk management, you gain predictability and peace of mind to focus on operations. We have extensive experience across many industries, including property, trade, manufacturing, shipping, oil and more.

Read more about the various interest rate hedging products at the bottom of the page or contact Risk Advisory.

We offer interest rate agreements tailored to underlying loans

We offer various interest rate agreements priced with NIBOR (or the equivalent rate in the relevant currency) as the reference rate. The agreements are tailored to the underlying loan with regard to repayment structure, interest rate periods and fixed term. The agreements regulate the terms for the mutual payment flows between the bank and the customer. As a general rule, one party will pay a floating rate.

Interest rate agreements provide significant flexibility in loan management

The fixed interest rate is determined based on the interest rate level at the time the agreement is entered into. As the remaining term of the agreement gradually becomes shorter and interest rate levels change, the market value of the agreements will also change. The agreement can also be terminated at any time without changing the underlying financing. In this way, the distribution of loans with fixed and floating rates in the loan portfolio can be changed without the need for refinancing. The use of interest rate agreements provides significant flexibility in loan management. This is also the reason for the steadily increasing use of such products.

The FX and Interest Rate Risk Seminar teaches you how to control financial risk

Our FX and IR Risk Seminar is a practical course for businesses who want better control over financial market risk. The course gives you a basic understanding of the foreign exchange and money markets in addition to the instruments used to control risk.