Interest rate risk management

Interest rate risk management aims at reducing uncertainty related to interest expenses and interest expenses related to unfavourable interest rate movements.
1

Improve the predictability of your company's interest expenses

You can make sure that interest rate movements may not bring about variations in cash flows and profits. 

2

You can flexibly manage your company's interest rate risk

We will together choose the ones that best suit your company's needs and the prevailing market conditions.

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Why does it pay to manage interest rate risks?

Interest rate risk arises from swinging interest rates in bond markets. The more your company has floating rate debt, the greater is the risk associated with a rise in interest rates. Products or services whose prices depend on interest rates may also expose your company to interest rate risk.

Interest rate movements may bring about variations in cash flows and profits while weakening your company's business predictability. Extra costs arising from unfavourable interest rate movements may at their worst risk your company's business profitability.

Interest rate risk management therefore aims at reducing uncertainty related to interest expenses and interest expenses related to unfavourable interest rate movements.

Hedging against interest rate risks

You can flexibly and effectively manage your company's interest rate risk through interest rate hedges. With interest rate hedges, you can modify your company's market view and risk tolerance to be in line with interest rate risk.  We have numerous hedging products to offer, from which we will together choose the ones that best suit your company's needs and the prevailing market conditions.

For example, interest rate hedging can be used to change the loan from a floating rate one to a fixed rate one or vice versa (interest rate swap), to set a maximum interest rate for the loan (interest rate cap) or a fluctuation range (interest rate corridor).

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Read more about interest rate hedging options below.

Interest rate hedging products

Interest rate hedging can be performed by linking it to a loan if OP's loan is involved or as a hedging agreement separate from a loan in which case a single agreement can flexible hedge the entire loan portfolio of your company or only part of it, irrespective of the lender.

Embedded interest rate hedging

Embedded interest rate hedging is a supplementary feature linked to a corporate loan granted by OP. With it, your company can hedge against interest rate risk associated with a floating rate loan. Interest rate hedges linked to the loan agreement include an interest rate cap and interest rate corridor with which it is possible to set a maximum loan interest rate, a range of variation or lock in a fixed rate.

When an interest rate hedge is linked to the loan, the terms and conditions of hedging must agree with those of the loan.

Separate interest rate hedging

Separate interest rate hedging enables your company to flexibly and effectively hedge against your company's interest rate risk. In case hedging is performed separate from the loan, the loan can be rearranged or paid off without cancelling the hedging. This means that hedging can cover the entire loan portfolio of your company or only part of it, irrespective of the lender.

The range of interest rate hedging products is broad. For example, an interest rate swap enables you to change your company's floating rate loan to a fixed-rate one and vice versa, and an interest rate cap ensures that your interest expenses will not rise above the agreed level. With a combination of different products, it is also possible to offer you  a personalised solution to meet your company's needs. When creating a hedging solution, we will consider your view interest rates and the prevailing market situation, in addition to the size and nature of your company's interest rate risk.

Corporate loans with an interest rate cap and corridor

Corporate loan with an interest rate cap

Would you like to protect against a rise interest rates while capitalising on low interest rates? Include an interest rate cap in your company's loan and you will ensure that your borrowing rate will not rise above the agreed level.

The interest rate cap sets a maximum rate for the varying reference interest rate applied to your loan. This is how make sure that your company's loan interest expenses will not rise above the agreed level. The total borrowing rate consists of the reference rate limited to a specific ceiling plus the markup. When the loan reference interest rate is below the agreed ceiling, the loan behaves like a standard floating rate loan, which means that your company benefits from the prevailing interest rates and any possible fall in interest rates.

The interest rate cap can be included in your company's new or existing loan with a cap and for a period of your choice. The loan must be linked to a Euribor rate but the repayment method is flexible. The cost of the interest rate cap is determined by the level of the cap, duration, bond-market conditions and principal. The interest rate cap premium is deductible in business income taxation. You may repay early your loan with an interest rate cap without any extra charges.

Loan with an interest rate corridor

Would you like to improve the predictability of your company's interest expenses? If you say yes, include an interest rate corridor in your loan. By means of the interest rate corridor, you can fix interest expenses for future years or set them a certain range of variation.

Designed for OP's corporate and institutional customers, loans with an interest rate corridor is a loan providing protection against rising interest rates. The loan is protected against a rise in interest rates through the interest rate corridor. The interest rate corridor is a combination of an interest rate cap and floor, which sets maximum and minimum levels for the reference rate of floating-rate loans. The reference interest rate applied to the loan with an interest rate corridor will not rise above the cap and at the same time you will benefit from a possible decrease in interest rates down to the floor. It is also possible to set the interest caps and floors at the same level in which case the floating rate loan becomes a fixed-rate one. This is how you will know in advance the amount of your company's future interest expenses. Total interest on the loan with an interest rate corridor is based on the abovementioned reference rate plus the agreed markup.

The interest rate corridor can be included in your company's new or existing loan for a period of your choice. The loan must be linked to a Euribor rate and repayments are made on an equal payment or interest-only basis. The interest rate corridor follows the loan terms and conditions and no changes to them may be made during the corridor's duration. Establishing an interest rate corridor is not subject to a charge but cancelling it during its validity may incur costs.

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