Interest Rate Hedging Policy: A vital tool for borrowers
Interest Rate Hedging Policy: A Vital Tool for CFOs
For the past 15 years, persistently low and stable interest rates have meant that hedging is a skill that many lenders, debt advisors, and borrowers have neglected. Now that interest rates are rising again, it is essential to understand how hedging can help protect your company’s assets from volatile markets. A well-crafted interest rate hedging policy document is an invaluable tool for CFOs to ensure their decisions are in line with the risk tolerance of the firm.
The Benefits of a Hedging Policy Document
A comprehensive hedging policy document allows companies to make informed decisions while striking a balance between operational freedom and corporate oversight. The document should specify the roles and responsibilities of the various stakeholders involved in decision making as well as the criteria used to evaluate potential hedges. The policy should also include guidelines on how financial instruments should be used to reduce exposure to volatility in interest rates or currencies and provide guidance on when a hedge should be entered into/terminated. It should also define acceptable limits and a reporting mechanism should there be a breach of policy so that corrective action can be taken.
The importance of having a clear policy document is further highlighted by current events; as valuations on interest rate sensitive assets like property and equities have been hammered, it is more important than ever for companies to make sure they are properly protected against fluctuations in interest rates. Without a well-defined policy document, companies that neglected to hedge when rates were close to zero could now end up making different but equally expensive mistakes.
Why Companies Should Prioritize Developing A Hedging Policy Document
Creating a hedging policy document takes time and effort but it is worth it in the long run. It helps create an environment where all parties are aware of their roles and responsibilities and encourages collaboration between different stakeholders when making decisions about hedging strategies. Furthermore, having a clear policy document will help ensure that any decisions being made are consistent with the company’s risk appetite and objectives while protecting against potentially costly errors or misjudgments due to inexperience or lack of knowledge about certain financial instruments or markets.
A Hedging Policy Document is Essential
Interest rate hedging policies are essential tools for CFOs seeking to strike a balance between operational freedom and oversight while ensuring that their decisions are aligned with shareholder risk tolerance levels. Developing such policies requires time, effort, collaboration amongst stakeholders – but doing so will help protect your business from volatile markets and costly mistakes arising from inexperience or lack of knowledge about certain financial instruments or markets. In short, it pays off!
Please contact the team at info@vucatreasury.com to find out more about how we’ve worked recently with firms to set their hedging policies. We look forward to hearing from you!