What is interest rate risk?

Interest rate risk is the chance that changes in borrowing rates raise your costs or reduce the value of what you hold. For most businesses, the biggest exposure is floating-rate debt, such as a credit line or term loan priced off a benchmark like SOFR. When rates climb, so do your interest payments.

Why it matters now

Central banks around the world have been raising rates to fight inflation, and borrowing costs have swung sharply. For a company with significant floating-rate debt, even a small move can change annual interest costs meaningfully and make budgeting harder.

Common tools

• Interest rate swaps: exchange floating-rate payments for fixed-rate payments, turning a variable cost into a predictable one.
• Caps: set a ceiling on your floating rate in exchange for an upfront premium, while still benefiting if rates fall.
• Floors and collars: a floor sets a minimum rate; combining a cap with a floor (a collar) limits how high and how low your rate can go, often reducing or removing the upfront cost.
• Cross-currency swaps: exchange both interest payments and principal between two currencies. They suit companies that borrow in one currency but earn in another, such as a US dollar loan repaid from revenue in Mexican pesos, covering interest rate and currency risk together.
• Fixed-rate borrowing: sometimes the simplest hedge is refinancing part of your debt at a fixed rate.

Tailored to your debt

Most interest rate hedges are traded over the counter rather than on an exchange, so they can be built to match your loan: the amount, start and end dates, payment schedule, and benchmark rate. Like FX forwards, they usually require a credit line or margin based on your company's financial profile, and their market value moves as rates change, which matters for your accounts.

Questions to ask

• How much of our debt is floating, and when does it mature?
• What would a 1% rise in rates cost us per year?
• Do our lenders require hedging under our loan agreements?
• Do we borrow in a different currency from the one we earn in?
• How will the hedge be treated in our accounts?

How Leveredge helps

We help you size your exposure and connect you with the right specialist partner to structure and execute a hedge. Book a call to start the conversation.

This article is general information, not financial advice. Derivatives involve risk, including costs if rates move in your favor after you hedge.