Interest rate hedging allows investors to reduce the risk involved in lending or investing in certain companies or stocks. The concept involves determining the difference between assets and liabilities and using hedging strategies to reduce the gap between the two.

Making the most of interest rate risk and hedging means knowing how to implement strategies and analysis into your business. There are several ways to do this, but a few options include:

1. Purchase software for interest rate risk hedging.

2. Take advantage of the membership perks available from interest rate hedging associations.

3. Learn about and implement hedging strategies using tutorials.

Action Steps
The best contacts and resources to help you get it done

Use software designed for hedging interest rates

Making the most of interest rate risk and hedging often means understanding how to best implement the concept into your business. Software often provides a quick way of implementation and offers you the tools you need for interest rate hedging strategies. Software can cost less than hiring staff or outsourcing to companies, if you know how to use the software.

I recommend: Financial Software Systems sells a program designed to help companies with interest rate hedging. The program offers a variety of tools to help with the various concepts involved in interest rate risk analysis. If you prefer web-based software, consider HedgeRX from Reval. This program works with hedging interest rate risk, analysis and management.

Join interest rate risk banking associations

Whether you want to get your name out to the industry to network your business or you want to expand your resources for interest rate hedging, an association can help you achieve your goals. Look for associations with a large membership to get the most benefit.

I recommend: The International Swaps and Derivatives Association (ISDA) publishes a wide range of information including information on how to hedge interest rate risk. It also provides its Master Agreement, which many companies use as protocol for interest rate hedging. The Hedge Fund Association offers articles on interest rate hedging. You can also locate a local chapter through its website.

Get hands-on information from interest rate hedging tutorials

Tutorials, sometimes called e-learning courses, can help you learn more information as well as help you find way to implement the information into your business. The price for tutorials can range from free to several thousand dollars depending on the expert providing the information.

I recommend: Mecklai Financial and Commercial Services provides online tutorials to help you learn to hedge interest rate risk. Research and Markets offers an e-learning course. Use it to find out more information on interest rate risk and decide how to best implement the strategies into your business. Frank J. Fabozzi Associates offers a tutorial on interest rate risk management and derivatives.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Not all companies feel interest rate hedging works as a viable option for reducing risk. Be sure you know the attitude toward the subject for the companies you plan to work with before you enter into a working relationship.

Hedge interest rate risk is susceptible to changes in interest rates. Managing interest rate risk is key to keeping your investments working for you. Naturally, this is part of foreign currency risk. The key is to manage the volatility of the market. Portfolios that practice managing interest rate risk can balance a portfolio with fixed income areas, or investors can engage in an interest rate floor contract.

Interest rate hedging is conditioned on previous interest rate risk analysis. Analysis is based on the risk of exposure to fluctuating interest rates. Strategies to mitigate hedge interest rate risks vary. They include interest rate swap and caps. Protect your investments by seeking interest rate risk analysis of your funds and protect them with investment management.

1. Interest rates are changing in today's markets, and banks and investors need to manage their portfolios in order to protect their investments.

2. Hedging is generally defined as making an investment to reduce the risk of adverse price movements in an asset. Bonds are more likely to be affected than stocks.

3. Interest rate risk analysis is necessary in order to create interest rate hedging strategies.

Action Steps
The best contacts and resources to help you get it done

Analyze your portfolio's interest rate risk

Assessing the vulnerabilities of your stock portfolio is the first step in securing your investments from the volatility of changing interest rates.

I recommend: CERA is a credentialed actuarial risk management program that trains people in risk management. Its website provides connections to people who have graduated it from its program who can do an analysis of your company's situation. Critical Watch offers a Vulnerability Management package which discovers the assets and risks of your portfolio.

Investigate interest rate risk hedging for your needs

Interest rate risk hedging is important, but be sure that you are aware of the pros and cons of any investment strategy.

I recommend: ING Investment Weekly does a good job in explaining the up and down sides of interest rate risk and hedging. It also lists and defines factors to consider and how they apply to the data of your portfolio. Interest rate swaps are explained by Green Interest Rate Swap Management. Measuring Risks is a must-read on interest rate risk analysis.

Find the solutions to your portfolio, bank or corporation's hedging interest rate risk

Hedging interest rates is a management tactic to be considered be considered after analysis by a financial specialist. Once an analysis is made, strategies should be put into play.

I recommend: Wachovia Corporate and Institutional offers risk management programs and analysts who can provide you with hedging strategies. TD Commercial Banking offers products and services that cover a wide range of investment protection.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Remember that strategies contain inherent risks, too. Any strategy comes with a fee, including interest rate hedging.

Interest rate risk and hedging basics can help you understand how banking and lending institutions calculate the risk involved in lending to a person or company. The guidelines also helps investment firms calculate the risk involved in investing in a specific portfolio. Unstable market conditions and variable interests rates both play a role in interest rate risk.

Some companies hedge interest rate risk to manage the risk involved in cash flow. Hedging interest rates allows a person or company to:

1. Decide when and whether to fix an interest rate.

2. Establish the terms of the interest rate, including whether or not to use a fixed interest rate.

3. Assign part of a debt to a fixed interest rate.

4. Use interest rate risk hedging to lock in an interest rate in advance.

Action Steps
The best contacts and resources to help you get it done

Use online sources to learn more about interest rate hedging

Online sources provide you access to in-depth information on interest rate hedging and how to implement the philosophies behind the concept. When it comes to hedging interest rate risk, investment experts disagree on whether it is a helpful or harmful practice.

I recommend: Investopedia, a Forbes Digital Company, offers an article on how companies use derivatives. Financial Pipeline provides education on financial concepts like interest rate risk analysis.

Grasp interest rate hedging strategies at classes taught by experts

Industries that deal with finance constantly change and evolve, which is why it can be beneficial to take a class. In some cases, it is easier and quicker to take a short course rather than delve through information on your own.

I recommend: The New York Institute of Finance offers a three-day course on advanced financial risk management. The class targets accountants, risk managers, auditors and analysts. Security Traders Association University offers a variety of classes designed to help you understand interest rate risk and hedging basics.

Work with companies or a interest rate risk manager to improve your business dealings

If you don't want to take the time to learn the information you need to know about interest rate risk and hedging basics, it might be beneficial to hire a professional to handle things related to the concept. In some cases, you may prefer to hire a company rather than a manager, but it all depends on your situation.

I recommend: ShattuckHammond.com offers products and services for hedging interest rates. Its services include debt policy development and education, independent valuations and analysis for portfolios and transactions. IntegraAdvisors offers interest rate risk analysis for companies in need of this particular service.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Some educational institutions offer a discount to members of interest rate risk organizations like the Security Traders Association. If you plan to take courses, it might be beneficial to get a membership first.

Interest rate risk is the potential for the value of an investment to change due to changes in interest rates. An example of such an investment is a bond. A bond’s duration measures its sensitivity to interest rates. When interest rates go up, the value of the bond decreases, and vice versa. Bonds with higher duration are more sensitive to interest rate changes. The danger of losing value on an investment because of unexpected changes in interest rates is very real, and requires careful risk management, or hedging. Hedging tools, such as swaps and interest rates futures, are available for a wide variety of interest rates, including Treasury rates, and LIBOR.

Action Steps
The best contacts and resources to help you get it done

Treasury rates

Treasury rates are expected returns on U.S. Government bills, notes and bonds, and come in a variety of maturities. These form the benchmark rates for bonds issued in the U.S. Treasury securities are considered to be free of default risk, and so they bear only interest rate risk. Therefore, they are used to measure interest rate risk for a variety of maturities.

I recommend: Look to TreasuryDirect for an excellent definition of Treasury rates and how they are calculated.

LIBOR

LIBOR is a popular base-line rate for international debt-related investments. The acronym LIBOR stands for London Interbank Offered Rate, and it's based on the average interest rate that international banks charge each other on short-term loans. It is a very popular rate used for managing interest rate risk.

I recommend: There is a helpful definition and historical record of LIBOR on MoneyCafe.com.

Term structure

Investments of different maturities have different interest rates. Usually, but not always, higher interest rates are offered on investments with longer maturities. Matching average interest rates to maturities gives a term structure of interest rates. The shape of the term structure gives a great deal of information about future interest rate movements, which can help you understand interest rate risk in the future.

I recommend: Check out The Financial Pipeline for an excellent discussion of the term structure of interest rates.

Interest rate futures

Interest rate futures make ideal hedging instruments. They are contracts in which a buyer and a seller agree to trade a debt instrument at some time in the future, for a price agreed upon prior to delivery. The value of such contracts is the ability to set the price for future delivery ahead of time. This reduces the risk of adverse changes in interest rates.

I recommend: BusinessDictionary.com provides a concise definition of interest rate futures. Check out the links to related terms as well.

Duration

Duration is a convenient measure of interest rate risk. Larger values of duration imply greater interest rate risk. This measure is insensitive to the size of an investment, and therefore allows comparison of the risk of a variety of investments. It is important to remember that when interest rates change, the duration may also change.

I recommend: Investopedia features a comprehensive, easily understandable discussion on duration.

Swap

A swap is another hedging instrument. It entails trading one type of interest rate risk for another. If a firm has debt with payments that vary based on changes in interest rates, a swap allows that firm to trade the debt payment for a payment that is fixed and known over time.

I recommend: Riskglossary.com offers a great explanation of interest rate swaps, including charts and graphs.