Interest rate hedging
Protect your business against unforeseen fluctuations in the interest rates.
What is interest rate hedging?
Interest rate hedging involves limiting the effects fluctuations in the market’s interest rates can have on your company. An increase in interest rates can have major consequences for a highly leveraged company. A number of financial instruments have been developed to manage interest rate risk. The purpose of these can be:
- to protect yourself against interest rate fluctuations;
- to adapt the debt portfolio according to expectations of future interest rates.
Most hedging products are flexible since they’re ‘bolted onto’ already existing loan agreements or other interest-bearing balance sheet items. The original loan agreement is not affected, and the funding can come from any other loan source. The hedging products can easily be adapted to each customer’s needs.
Why is interest rate hedging necessary?
Changes in the Norwegian economy and international interest rates affect the Norwegian interest rate levels. Norwegian companies’ results are directly affected by changes in interest rate levels, and it is therefore important to manage the impact.
More predictable cash flow
Predictable cash flow has become increasingly important for a company’s board of directors and owners. As a result of this, the demand for advisers on interest rate management has risen sharply. DNB Markets boasts broad expertise in risk management of loan portfolios. The use of different types of interest rate derivatives has increased in line with the need for risk management. There are now almost unlimited possibilities for managing risk with different products and combinations of these.
Our advisers can set up an interest rate strategy
Our experienced advisers will help you formulate 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 get predictability and peace of mind so you can focus on operations. We have extensive experience across many industries, such as property, trade, production, seafood, shipping, oil etc.
Read more about different interest rate hedging products at the bottom of this page or get in touch with Risk Advisory.
We offer interest rate agreements that are tailored to the underlying loan
We offer various interest rate agreements priced with NIBOR (or the equivalent interest rate in the relevant currency) as the reference rate. The agreements are tailored to the underlying loan relative to the repayment structure, interest rates and lock-in period. The agreements regulate the conditions for the reciprocal payment flows between the bank and the customer. As a rule, one of the parties will pay variable interest.
Interest rate agreements allow for significant flexibility in loan management
The fixed rate of interest is determined by the interest rate at the time the agreement is signed. Since the remaining term of the agreement eventually 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 the underlying financing changing. In this way, the distribution of loans with fixed and variable interest rates in the loan portfolio can change without refinancing being necessary. The use of interest rate agreements allows for significant flexibility in loan management. This is also why there is a steady increase in the use of these 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.
Our products and services for interest rate hedging
Forward rate agreement (FRA)
An agreement on hedging interest rates for a future interest rate period.
Interest rate swap (IR swap)
An agreement between the bank and customer about swapping future interest rate payments.
Interest rate options (IRO)
Buy the right, but not the obligation, to enter an agreement about setting interest rates.
Interest rate swaption (IR swaption)
An option agreement that gives you the right, but not the obligation, to enter into a swap.