Interest Rate Risk Hedging Workshop

Thursday, December 5

09.00 - 09.10 Welcome and Introduction

09.10 - 12.30

Interest Rate Risk and the Hedging Decision

  • How does interest rate risk arise within a company?
    • How are companies financed?
    • Equity versus debt
    • Why do commercial banks lend on a variable rate basis?
    • Why do companies usually want to pay a fixed rate?
  • The market for fixed-rate loans
    • Why are fixed-rate loans so rare?
    • Is there still interest rate risk if you have a fixed rate loan?
  • The corporate hedging decision - inside the mind of the corporate treasurer
    • How is risk identified and quantified?
    • What are the pros and cons of hedging?
    • How much risk do we hedge?
    • How does a typical company make the hedging decision?
    • Comparing to peers, does it matter what they do?
  • Dealing with banks
    • What do banks get out of it?
    • What happens to the risk once the company has hedged?
    • Understanding how banks profitably seek and manage risk on hedging deals
  • Exercises:

  • Corporate financing decisions
  • Hedging discussion

12.30 - 13.30 Lunch

13.30 - 17.00

Interest Rate Measuring and Managing

  • How do we measure interest rate risk?
    • Description of quantitative measures of interest rate risk
    • Duration and DV01
    • Duration gap analysis
  • How can we forecast cash flows and expected debt requirements?
    • Cash flow statement forecasting
    • Stress-testing our cash flow forecasts
  • Macro hedging
    • Creating a risk management policy
  • Managing the structural impact of low/high interest rates
  • Exercises:

  • Interest rate exposure calculation
  • Building a simple cash flow statement forecast

Interest Rate Risk Hedging

  • What are the hedging products available?
    • Pros and cons of different hedging choices
    • Plotting the future scenarios
    • Linear products versus option products, how do we strike the right balance?
    • When is it a hedge and when is it not?
    • Balancing the floating-rate and fixed-rate mix
  • Using FRAs and swaps to hedge
    • Understanding the pricing and the settlement of the hedging product
    • Aligning dates and amounts

Friday, December 6

09.00 - 12.30

Interest Rate Risk Hedging (cont.)

  • Using an option-based hedge
    • Paying a premium or constructing a zero-cost combination?
    • Using exotic options - how do we balance flexibility and complexity?
  • Flexible hedges
    • How can we construct a hedge for a variable debt amount?
    • Using variable notional swaps - how are they constructed and priced?
  • Bringing the products together
    • Examination of the full spectrum of interest rate hedges available
  • Other hedging issues
    • Appropriateness and suitability rules
      • Analysis of previous bank mis-selling cases
    • Hedging accounting under IFRS9 - why does it matter?
      • Reporting of hedge P/L
  • Exercises:

  • Liability hedging using derivatives
  • Using full and partial hedges

Hedge Lifecycle

  • How to deal with changing circumstances?
    • Using rolling hedges
    • Pre-hedging known future exposures
  • Evolution of hedge P/L
    • What effect does the shape of the yield curve have?
    • Dealing with curve roll down and negative carry
  • Breaking the hedge - what happens when the hedge is no longer needed?
    • How do banks compute break costs?
  • Exercise: effect of yield curve shape on carry and break costs

12.30 - 13.30 Lunch

13.30 - 17.00

The Future of IBOR Reference Rates

  • What is the future of IBOR reference rates?
    • If they are being replaced, what are the replacement rates?
    • The new Risk-Free Rates (RFRs)
  • How do the new RFR rates work?
    • How is interest calculated?
    • How do we create a term rate to replace IBOR?
  • How will the replacement of IBOR effect corporate hedging?
    • Timing issues between loan and derivative hedging rates
    • Legal and accounting risks
  • Exercises:

  • Interest rate calculations using RFRs
  • Dealing with legacy IBOR contracts

Analysis of Real Company Hedging Decisions

In this session, we analyse some real company interest rate hedging decisions and hedging policies. Participants will be given some company annual reports and asked to find evidence of interest rate risk calculations and risk management policies. Participants will be invited to draw conclusions on the logic behind the hedging policy and the hedging products chosen.

Termination and Evaluation of the Workshop

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