How to manage interest rate risk. How to reduce interest rate hedging cost.
Interest rate swaps are used for hedging and managing interest rate risk. The swaps can be either floating to fixed, fixed to floating or a basis swap.
Most commonly used swaps in the global markets is a USDIRS which is a swap against Libor. The IRS or interest rate market is fairly liquid.
While the IRS levels are displayed in screen for standard tenor, often the loan will have an amortisation profile or interest rate dates which will not match with standard curve
- Zero rates
- Appropriate interpolation
- Adjustment of Libor basis
- Ensuring fairness in dealing by avoiding mark up
- Appropriate credit charge adjustment.
- Scenario analysis
- Evaluation of caps, floors, collars and FRAs
- Timing of the IRS
- Execution of the IRS
- Outlook on Libor and how that compares with FRAs
- ISDA documentation etc.
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