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.