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How negative rates can jeopardize your IR hedge program

by Jack Large

Key timing points
0:38 4 major factors in IC hedging and accounting
1:36 Variable Rate Debt
1:45 - How floors impact variable debt
4:00 - Floor value – How they are moving
6:12 Protecting volatility
6:15 - Understanding your risk appetite
8:06 - Derivative structure
11:41 You didn’t match the floor, so what do you do now?
11:45 - Effectiveness assessment requirements
14:11 - What can be done to create an effective hedge?
16:45 - Key takeaways
18:28 Final comments

CTMfile take: Ruth Hardie’s advice on how to use floors and swaps to protect your company in today’s low interest/negative rates environment could save you loads.

Ruth Hardie, Senior Director, Client Services, Hedge Trackers explains how to when and where to use floors and other techniques to ensure that negative rates do not jeopardize your interest rate hedging programme 

The WEBchat covers:

  1. Four major factors in interest rate hedging
  2. Variable rate debt
  3. Protecting volatility
  4. You did not match the floor, so what do now?
  5. What can be done to create an effective hedge

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Comments

By Stephen Calver on 11th May 2020:

Very useful thank you Jack and Ruth.  I think there are few corporate entering into float to fix on medium term debt in order to lock in a low rates for some time, whilst expectation this could continue for several years, it does bring certainly for the rate and potential upside when rates eventually go back up.  Certainly did explore floors at time of entering into swaps.

By Ruth Hardie on 11th May 2020:

Thank you for the comments.  We have seen a lot of clients hedge their floating rate debt recently.  Some have to as part of their debt agreement - but most are looking to lock in the low rates.  It is becoming increasingly common in the US to replicate the 0% floor on the debt in the swap either over the entire term of the hedge or for only the first few years.  Prior to March, this is not something that was common.  In fact, many companies chose not to replicate the floor when hedging 0% floored debt.  That has become riskier with the dip in rates that we have seen and those choosing the replicate the floor for only a few years are striving to balance the risk of rates dipping below zero with the cost of adding a floor to the swap.

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