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Interest rate hedging

For better planning of interest costs

When it comes to long-term financing, it makes sense to consider the risk of rising interest costs. We show you how you can protect yourself against interest rate risks.


Interest rate hedging at a glance
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Hedging by means of targeted product selection

Regardless of the type of financing, suitable products allow you to mitigate the negative consequences of rising interest rates or even eliminate them entirely. There are several options available to you:

Combining different terms to maturity: Diversifying the interest rate fluctuation risk by staggering the due dates/terms to maturity.

Forward contract: Entering into a financing arrangement with a fixed interest rate (e.g. fixed loan) before the cut-off date for payment. This can also be used for refinancing to hedge the interest rate risk in advance.

Ordinary switch to a different product: If the type of contract (e.g. SARON Flex mortgage) allows it or once a fixed-interest period has expired.

Hedging using interest rate derivatives

With interest rate derivatives, you can hedge your financing arrangements against interest rate risks. This makes it easier to plan and protects your company against unfavorable interest rate trends. Interest rate derivatives are particularly suitable for larger companies or real estate companies since a certain minimum volume applies. There are various hedging instruments available, and their individual benefits and risks should be analyzed in detail based on the client's circumstances. One of the most common interest rate derivatives is swaps.


   

    Benefits based on the example of swaps   

  • Hedging the interest risk months or even years before (re)financing.

  • Ability to hedge over long terms to maturity.

  • Increased financing flexibility: Because the interest rate hedging transaction is unrelated to the lending, capital requirements can be adjusted at every rolling deadline.

  • Allows efficient adjustment to current requirements (e.g. postponement of the start date, nominal adjustment).


   

    Risks based on the example of swaps    

  • When you conclude a swap, you are no longer able to benefit from lower interest rates for financing.

  • If you decide to terminate the swap early, you may incur costs depending on the market situation.

  • A swap always involves the actual variable interest rate, even if it is negative. In the current interest rate environment, this increases financing costs.


   

    Example of using interest rate swaps    

  • In an interest rate swap, a fixed interest rate is swapped for the current variable interest rates (even if these are negative) based on a pre-defined nominal value for a fixed period. Concluding an interest rate swap costs nothing since both parties agree to make interest payments in the future.

  • The start date can be immediate or years in the future. This is a simple way to hedge future financing arrangements in particular since the swap rate can already be fixed now. The effective financing is taken out on the basis of SARON at the time of financing (SARON never less than zero) and then rolled on a short-term basis over the term of the financing.

         Illustrative example: Interest rate swap

  • You agree to pay a set interest rate ("swap rate"), agreed at the time of concluding the swap, over the term of the arrangement. In return, you receive a variable interest rate from the bank (for example SARON). The financing is managed as a floating rate loan, where you pay the credit margin and the variable interest rate (e.g. SARON).

  • A swap always involves the actual SARON, even if it is negative. In the current interest rate environment, this means that you pay SARON to East Pacific Bank.

  • For floating rate loans, the maximum value of the current SARON or 0.00% is always used. This increases the cost of financing when SARON is negative.