September 23, 2022

5 questions to ask: interest rate hedging

GBP interest rates are expected to reach over 5% in 2023, here are 5 questions to ask before you enter in to an interest rate hedge 🎯

1. Risk

What is the underlying risk? Is there any natural hedge in your portfolio or project?

2. Product:

What is the best derivative to hedge your financial risk in a rising interest rate environment? Should you hedge with a combination of instruments instead of just one?

3. Tenor:

Given the inverted curve (long term rates lower than short term rates), can you delay the start date of your hedging, decreasing your long term interest cost? Or perhaps consider a longer tenor?

4. Quantification:

To what extend do you want to mitigate your risk? Are you maximising your return and minimising risk?

5. Downside protection:

If you do take some risk in your hedging strategy, will there be a cash impact if things go south and the central bank raises rates faster than expected to tame inflation? What is the impact of such an event / trigger?

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