Hedged Loan
A hedged loan combines floating-rate debt with interest rate derivatives to create synthetic fixed-rate exposure, protecting against rate increases while retaining prepayment flexibility.
| Hedging Instrument | Mechanism |
| Interest rate swap | Pay fixed, receive floating |
| Interest rate cap | Sets maximum rate, pay premium |
| Collar | Cap maximum and minimum rates |
| Forward rate agreement | Lock future rate for specific period |
| Swaption | Option to enter swap at future date |
| Hedge Example | Details |
| Floating-rate loan | EIBOR plus 2%, currently 7% |
| Interest rate swap | Pay fixed 5%, receive EIBOR |
| Net borrowing cost | 5% fixed plus 2% spread = 7% all-in |
| Rate protection | If EIBOR rises to 8%, still pay 7% |
| Prepayment flexibility | Can repay loan, unwind swap |
| Swap termination cost | Mark-to-market value if rates moved |
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