Swaps provide more flexibility for community banks to offer long-term, fixed-rate loan financing to their customers. With traditional interest rate swaps, the bank offers a floating-rate loan and interest swap directly to their customers. Traditional swaps are the most common hedging tool offered by community and regional banks.

Hedge accounting is a special election that provides favorable accounting for derivatives when a company meets certain requirements. Corporates elect hedge accounting because it aligns the recognition of gains and losses on the derivatives with the underlying hedge transaction on the income...

An interest rate cap is an insurance policy on a floating-rate index like SOFR, LIBOR, SONIA, or EURIBOR. It pays out to the purchaser of the cap if the index rate increases above a pre-determined threshold (the “strike rate”). When this happens, the cap is considered “in-the-money.” Once a cap...

Banks use back-to-back swaps to meet borrower demand for long-term fixed-rate loans. With back-to-back swaps, the bank enters a floating-rate loan and a fixed-rate swap with the borrower and then a second, offsetting swap with a dealer counterparty.

The upfront costs of interest rate caps have increased significantly in the past six months as short-term rates have risen and expected payouts on these caps have increased in probability and amount. This piece analyzes how cap pricing in the USD interest rate market factors-in expected future...

For corporations using derivatives to manage financial risk, the question of whether to apply hedge accounting has been highly debated. While there is no “one-size-fits-all” answer, overcoming these five common misconceptions can facilitate the decision to initiate, expand, or overhaul a hedge...

How SOFR, the benchmark rate chosen by the ARRC to replace USD LIBOR, works and what drives its movements.

Cross-currency swaps are becoming an increasingly common derivative within corporate debt capital structures. As organizations assess whether this product is befitting to their profiles, they consider a variety of questions — ranging from trade structuring to accounting treatment. In this...

Many financial institutions have experienced excess liquidity over the last few years as a result of the pandemic and associated fiscal stimulus. However, a more recent pick-up in loan demand is causing institutions to think more about future funding needs.

You may not have noticed, but your interest rate hedge may be worth quite a bit of money. As the Fed turns more hawkish in the face of inflation (which seems to be more than transitory), the forward curve for short-term rates has steepened significantly. The market is pricing in as many as seven...