Protect
Shields businesses from fluctuations in interest rates.
Fix
Guarantees future cash flows at a predetermined interest cost.
Manage
Supports more accurate budgeting and helps to plan cash flows even if rates are volatile.
Hedging interest risk: how it works
Interest rate risk arises when your company has loans or other financial obligations with a floating interest rate (such as loans linked to the Euribor reference rate). Interest rate fluctuations can impact the business’s cash flows and financial results, resulting in unexpected costs or uncertainty for budgeting.
Hedging interest rate risk helps avoid this uncertainty, ensuring financial stability and better planning ability.
LHV Pank offers interest rate swaps where a floating interest rate is exchanged for a fixed one. That fixes borrowing costs at a set level, reducing risk related to interest rate hikes and guaranteeing that your company’s cash flows are more predictable.
Interest rate swaps
An interest rate swap is a financial instrument designed to turn a floating interest rate (e.g., the six-month Euribor) into a fixed interest rate or vice versa.
The swap is concluded for a specific period and interest payments are exchanged at an agreed regular interval. Usually one party will pay a fixed interest rate and the other party will pay a variable interest rate.
LHV offers interest rate swaps to companies with a valid financial transactions framework agreement and LEI code.
Example
A company has a five-year loan with an interest rate linked to the 6-month Euribor. The company wishes to protect itself against interest rate risk, so it enters into an interest rate swap with LHV where it pays interest at a fixed rate of 2.5% and LHV agrees to pay the floating Euribor rate in return.
For the company, the floating interest rate loan thus becomes a fixed interest rate obligation. Regardless of further changes in the Euribor, interest rate costs become forecastable and uniform for the entire period.
Contact us
Our experienced experts will help you to find the best solution for fulfilling your company’s needs, whether it is short-term protection against risk or managing a longer-term risk. In cooperation with LHV Pank, you can ensure sustainability of your operations and focus on business growth.
Call 684 8388 or email treasury@lhv.ee.