Hedging Interest Rate Risk

This chapter focuses on one of the most common financial risks that an entity may hedge: interest rate risk. This risk arises from entities holding interest-bearing financial assets and/ or liabilities, or from forecasted or committed future transactions including an interest-bearing element. An entity's ability to manage interest rate exposure can enhance financial exposure, mitigate losses, and reduce funding costs. The chapter provides practical insight into the accounting implications of a chosen interest rate hedging strategy. In order to emphasise the practical angle of interest rate hedge accounting, several cases are analysed in detail. It covers the hedge with an interest rate swap and zero-cost collar of the variability in interest payments pertaining to a floating rate debt due to changes in interest rates. The chapter illustrates the accounting treatment of hedges of highly expected future issuance of fixed rate debt with a forward starting interest rate swap.