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Three Products that Protect Against Fluctuating Market Rates

Written by Mark Kroencke, Executive Vice President, Commercial Lending; Steve Eikenberry, Senior Vice President, Commercial Lending

 

Business owners are likely familiar with an old saying: the greater the risk, the greater the reward. With the inherent uncertainty of running a business in mind, business owners are always looking for ways to profitably expand—while also softening the blow should those risks not pan out. That’s why they may benefit from hedging, a strategy that can help to offset some of the potential risks and stabilize costs.

As a business owner, you’re constantly balancing your revenue with outgoing expenses. That can be tricky when you’re paying a loan and the interest rates increase. Hedging products are not loans in and of themselves. Rather, they’re separate contracts that act as a kind of insurance policy protecting your cash flow from fluctuating interest or exchange rates.

Establishing a fixed interest rate provides several key benefits: reduced uncertainty in cost structure, protected profit margins should interest rates rise, and allowing the business owner to focus on operating their companies instead of worrying about market fluctuations. Plus, hedging enables business owners to match the funding of their long-term assets with long-term fixed rate liabilities.

How these 3 Hedging Products can Help

There are varieties of hedging products available in the marketplace. We break down the products we work with below to help clients offset risk by establishing a predictable cash flow and mitigating expenses due to increasing market rates.

  • Swaps. An interest rate swap enables borrowers to convert a floating rate loan to a fixed rate. Swaps are among the most popular hedging offerings at First American because, among other benefits, they can be executed quickly with minimal costs and provide more flexibility than conventional fixed rates. Interest rate swaps are ideal for borrowers concerned with significant exposure to floating interest rates. Swaps can also be used to lock in rates for a longer term than traditional fixed rate loans. For business owners who need to stabilize operating costs, locking in an interest rate can help.
  • Caps. A cap limits how high a floating interest rate can rise while still permitting the borrower to benefit from drops in rates. They are typically purchased upfront with one payment and serve as an insurance policy protecting the borrower against fluctuating interest rates. Caps allow a borrower to choose the level of protection; set a higher cap level to reduce the upfront cost or set a lower cap level to provide greater protection.
  • FX Hedging. This product is ideal for companies who do business internationally and want protection against fluctuations in the exchange rate between foreign currencies and the US dollar. For example, let’s say your business is looking to purchase machinery from a company in Europe in six months. A Foreign Exchange hedge will enable you to lock in a purchase price ahead of time to avoid paying extra costs should the exchange rate between the dollar and the Euro fluctuate unfavorably.

 

The Opportunity Today

Given the currently low interest levels, it’s a particularly opportune time to lock in a favorable rate for years to come on the entirety of a loan, or just a portion of it. Hedging can appear complex, so it’s important to consult with an experienced financial partner who can guide you through the process and ensure you are set up for success.

Our trusted advisors are especially adept at helping our clients analyze their hedging options and understand the complexities and how to best position a client to yield the benefits.

Minimize Your Risk With Hedging

Start Planning

 

LinkedIn:

Connect with Mark on LinkedIn

Connect with Steve on LinkedIn  

Contact:
Phone 305-400-3334
Email: business@firstambank.com

Disclosure: First American Bank is a Member FDIC.  

Check out more articles from First American Bank:

Maintaining Steady Cashflow Throughout Business Cyclicality

The Healthcare Account Helping Companies Save

Liquidity Strategies for Growing Businesses

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Drew Limsky

Drew Limsky

Editor-in-Chief

BIOGRAPHY

Drew Limsky joined Lifestyle Media Group in August 2020 as Editor-in-Chief of South Florida Business & Wealth. His first issue of SFBW, October 2020, heralded a reimagined structure, with new content categories and a slew of fresh visual themes. “As sort of a cross between Forbes and Robb Report, with a dash of GQ and Vogue,” Limsky says, “SFBW reflects South Florida’s increasingly sophisticated and dynamic business and cultural landscape.”

Limsky, an avid traveler, swimmer and film buff who holds a law degree and Ph.D. from New York University, likes to say, “I’m a doctor, but I can’t operate—except on your brand.” He wrote his dissertation on the nonfiction work of Joan Didion. Prior to that, Limsky received his B.A. in English, summa cum laude, from Emory University and earned his M.A. in literature at American University in connection with a Masters Scholar Award fellowship.

Limsky came to SFBW at the apex of a storied career in journalism and publishing that includes six previous lead editorial roles, including for some of the world’s best-known brands. He served as global editor-in-chief of Lexus magazine, founding editor-in-chief of custom lifestyle magazines for Cadillac and Holland America Line, and was the founding editor-in-chief of Modern Luxury Interiors South Florida. He also was the executive editor for B2B magazines for Acura and Honda Financial Services, and he served as travel editor for Conde Nast. Magazines under Limsky’s editorship have garnered more than 75 industry awards.

He has also written for many of the country’s top newspapers and magazines, including The New York Times, Washington Post, Los Angeles Times, Miami Herald, Boston Globe, USA Today, Worth, Robb Report, Afar, Time Out New York, National Geographic Traveler, Men’s Journal, Ritz-Carlton, Elite Traveler, Florida Design, Metropolis and Architectural Digest Mexico. His other clients have included Four Seasons, Acqualina Resort & Residences, Yahoo!, American Airlines, Wynn, Douglas Elliman and Corcoran. As an adjunct assistant professor, Limsky has taught journalism, film and creative writing at the City University of New York, Pace University, American University and other colleges.