Analyzing the economics of an indirect swap hedging program
Summary
The CEO of a community bank who actively offers indirect swaps to borrowers contacted Chatham and was looking to analyze pricing. They wanted better visibility into the economics of a $6.8M transaction the bank had recently executed.Key goals
- Understand the economics of indirect swaps offered by correspondent banks
- Gain visibility into the referral fee the correspondent bank paid the community bank
Our approach
- Leveraged Chatham’s presence and experience in the capital markets, and compared the economics of the transaction and referral fee from the correspondent bank to what the community bank would have received had they offered the swap to their customer themselves
Results
- Chatham’s RateManager program, a commercial loan hedging solution, would have delivered $154,000 more to the bank on a single $6.8M swap. The improved economics could have been recognized through fee income, loan spread, reducing the customer’s fixed rate or some combination of the three. Here are three illustrations:
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About the author
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Bob Newman
Managing Director
SalesFinancial Institutions | Kennett Square, PA
Bob Newman is a Managing Director in Chatham’s Financial Institutions business and brings nearly 40 years of experience in banking and currently advises community and regional banks in the Mid-Atlantic region.
Disclaimers
Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.
Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.
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