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HedgeTalk: What Are Five Commonly Used Derivatives for Hedging Interest Rate Risk?

Minneapolis, MN | March 7, 2024 | By: John Trefethen, Director and Co-Founder

Graphic of Five Commonly Used Derivatives for Hedging Interest Rate Risk

For this week’s HedgeTalk, we list five commonly used derivatives for hedging interest rate risk:

  1. Interest rate swaps.  Interest rate swaps are an over-the-counter contract between two parties to exchange interest rate cash flows over a specified period.  Swaps are commonly used to convert variable-rate exposures to fixed-rate and vice versa.

  2. Interest rate futures contracts.  These are standardized agreements to buy or sell a specified amount of a financial instrument at a predetermined future date and at an agreed upon interest rate.

  3. Eris SOFR swap futures. Eris SOFR swap futures replicate the cash flows of vanilla interest rate swaps.  Unlike traditional futures, end users can hold Eris SOFR contracts until final maturity avoiding forced rolls and making them more hedge accounting friendly.

  4. Interest rates caps and floors. These are contracts that provide protection against interest rate fluctuations within a specified range.  Caps set a maximum interest rate while floors set a minimum rate. 

  5. Interest rate options.  Options give the holder the right, but not the obligation, to buy or sell an underlying asset at a specified price before or at the expiration date.


The right choice of hedging instrument depends on a variety of factors including the nature of the underlying exposure, market conditions, and the risk management strategy of the entity involved.


Author: John Trefethen, Director and Co-Founder

Mobile: 612-868-6013

Office: 952-746-6040

HedgeStar Media Contact:

Megan Roth, Marketing Manager

Office: 952-746-605



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