Managing Interest Rate Swaps
Managing interest rate risk can make or break the success of a project. Derivative Logic knows how to design hedging strategies that give clients the greatest financing flexibility at a low cost. We provide unbiased analysis and a menu of hedging choices so borrowers can make informed decisions. The primary hedging option banks offer is a vanilla interest rate swap.
Swaps are the most commonly used hedging instruments typically offered by banks. They work best when used to hedge long-term financings of five years or more. Whether your interest rate exposure lies with the movement of SOFR, SIFMA or Prime, a swap is a separate contract from the loan and confers significant hedge customization outside the parameters of the financing.
What Is An Interest Rate Swap?
A vanilla interest rate swap is a contract to exchange cash flows for a period of time, based upon a principal amount where one cash flow is calculated with a floating interest rate and the other is calculated with a fixed interest rate index
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Your individual loan provides the template to match
The floating rate index typically used is SOFR (1- or 3-month), but swaps can also use Prime, SIFMA (tax-exempt rate) and other floating rates.
Swaps create a similar result to a fixed rate loan for borrowers, with a two-way make-whole provision.
Swap Mechanics – Two Important Pieces
The Monthly Settlement
- Net Exchange of Interest Cash Flows
- Difference between fixed and floating rate is paid
- With a floating debt payment and this settlement, the synthetic fixed rate is achieved each period
The Mark-to-Market
- Positive or negative paper value change based on market movement
- Trends to zero as contract moves towards maturity
- Equal to the expected sum of all remaining periodic settlements
When market rates shift, the value of a swap shifts as the expectations for future floating rates change. This value is an unrealized gain or loss unless the contract is terminated by the borrower. Each swap termination valuation is deal-specific and market factors at termination.
Talk to Our Expert
We Can Help
Derivative Logic helps clients execute swaps that match their risk profiles at the right price. We help clients manage and terminate interest rate swaps as necessary.
Please contact us to learn more or help you review your swap portfolio.
Call Derivative Logic Today at (415) 510-2100
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What Our Client Says
FAQ’S
Why do I need help with my interest rate swap?
Interest rate swap pricing is not transparent – you don’t realize how much the bank is making off you. Structuring options are never fully presented – the vanilla swap is the most profitable for banks.
How do I get out of my interest rate swap?
It’s complicated, but there may be ways to defer payments, amortize the costs, blend and extend with a new deal or transfer the trade to a new bank. Give us a call to discuss your specific transaction..
What are the risks of interest rate swaps?
There are a few, but the biggest risk in buying a swap is figuring out you don’t need it down the road. This is why initial structuring is so important for borrowers, and why the full value of expert advice on your side often appears well after a transaction has closed.
What does SWAP stand for?
Nothing! It’s not an abbreviation, it’s literally a swap of cashflows. But swaps can be financially important enough for your company to think about with CAPITALIZED emphasis, so give us a call to discuss your deal!
Why would I do an interest rate swap?
How do I calculate my swap rate?
The short answer – WITH HELP! The rates quoted on Bloomberg or in the Wall Street Journal are often not specific enough for your unique situation. They are general indications of market prices. The details, like day counts, payment frequency, index, amortization, and discounting are not the same and they matter for your deal.
