HedgeStar's Top Five Signs That You Are Not Hedging Interest Rate Risk
Minneapolis, MN | December 5, 2023 | By: John Trefethen, Director and Co-Founder
Number Five: You are experiencing increased financing costs. Not hedging interest rate risk can lead to increased financing costs for organizations with variable rate debt. Hedging variable rate debt locks in a financing’s cost of debt service.
Number Four: Reduced Profit Margins. Fluctuating interest rates can directly affect profit margins, especially for businesses that operate in sectors sensitive to interest rate changes, such as banking and real estate. With proper hedging, unexpected interest rate movements will not erode margins or hinder business growth.
Number Three: Cash Flow Volatility. Not hedging interest rate risk can result in unpredictable cash flows, making it challenging to manage financial obligations. Hedging interest rate risk will help prevent cash flow shortages from unanticipated interest rate fluctuations enhancing operational stability and growth opportunities.
Number Two: Diminished Investment Returns. Failure to hedge interest rate risk can lead to reduced investment returns from fixed income investments such as bonds. Hedging interest rate risk will help prevent rising interest rates from decreasing the market value of a fixed income portfolio.
Number One: Financial Distress. Unmanaged interest rate risk exposes a business to financial distress when they are heavily reliant on variable rate debt or have exposure to interest rate sensitive instruments. Hedging interest rate risk will help deliver financial stability to the organization.
Learn more today and contact a HedgeStar expert!
Be on the lookout for our next top 5 list – The top five signs that you are not applying hedge accounting to your risk management program.
Author: John Trefethen, Director and Co-Founder
Mobile: 612-868-6013
Office: 952-746-6040
Email: jtrefethen@hedgestar.com
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Email: mroth@hedgestar.com
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