In What Scenario Would a Company Use an Interest Rate Swap for Hedging?
A company with a floating-rate loan would use an interest rate swap to hedge against the risk of rising interest rates. In this scenario, the company would enter into a swap agreement to pay a fixed interest rate to a counterparty in exchange for receiving a floating rate payment.
The received floating rate payment would then be used to service its loan. This effectively converts the unpredictable floating-rate debt into a predictable fixed-rate obligation, providing stability for financial planning.
Glossar
Interest Rate
Yield ⎊ Interest rate, within cryptocurrency derivatives, represents the cost of capital or the return on an underlying asset utilized in constructing a derivative position, impacting pricing models and arbitrage opportunities.
Rate Swap
Mechanism ⎊ A rate swap, within cryptocurrency derivatives, represents an agreement to exchange interest rate exposures on notional principal amounts, often referencing a fixed crypto lending rate against a floating rate benchmarked to a stablecoin yield or a traditional fiat interest rate.
Interest Rate Swap
Contract ⎊ An interest rate swap is a bilateral over-the-counter derivative contract where two counterparties agree to exchange future interest payment streams over a specified notional principal amount for a defined period.
Floating Rate Payment
Payment ⎊ A floating rate payment represents an interest payment where the rate is not fixed for the duration of the instrument but rather adjusts periodically based on a pre-defined benchmark rate.