Hedge Program Design
Optimize Your Risk-Cost Profile
The goal of a well-designed hedge program is to optimize your risk profile, by balancing the benefits of hedging with the cost of protection. DerivGroup begins every hedge program assignment with a thorough analysis of the client’s financials, alongside a discussion of risk tolerance and future flexibility requirements. Based on this evaluation, DerivGroup recommends the most appropriate hedge instruments and structures tailored to your unique needs.
Choosing the Right Hedge Instrument:
Interest Rate Swap or Interest Rate Cap?
Analysis for Hedge Program Design
- Historical back-testing
- Hypothetical rate scenarios
- Extreme-case outcomes and probabilities
By leveraging its proprietary real-time analytical software, DerivGroup is able to price hedges with precision. Using this tool, we value each component part of the transaction, providing you with complete price transparency necessary for an accurate cost-benefit analysis and an optimal hedge solution.
Competitive Bidding and Negotiation for the Best Hedge Terms
After completing the analysis, DerivGroup develops transaction specifications and contacts potential providers to gather competitive bids. We then assist in negotiating favorable terms and pricing, ensuring that you receive the best deal possible.
- Airlines locking in current jet-fuel prices for future deliveries.
- Food manufacturers mitigating the risk of rising crop prices.
- Air conditioner manufacturers establishing a fixed price for future copper deliveries.
Hedge Program Design
Comprehensive Hedge Program Design
Risk Assessment and Needs Analysis
DerivGroup will identify specific hedging needs under your loan due to required financial ratios and covenants. Additionally, any voluntary financial targets which you would like to meet by hedging can also be included in these considerations.
Hedge Structure Design
DerivGroup will analyze the current economic environment to determine which possible hedge structures are best suited to achieve the financial goals of the company. We consider the company’s tolerance for risk, as well as desired future flexibility.
DerivGroup will identify the economic benefits and risks of possible hedge structures, including hypothetical performance under current market and economic conditions, and hypothetical rate scenarios.
Documentation Review
✓ Preparing and distributing Term Sheets to potential banks
✓ Negotiating hedge documentation (ISDA agreement) from banks
✓ Completing documentation to comply with Dodd-Frank Act requirements.
Pricing, Negotiation & Execution
When the hedge is ready to be executed, DerivGroup uses real-time market information to negotiate for you the best pricing from the bank. This pricing negotiation typically saves our clients a multiple of our fee.
After the hedge price is agreed to, DerivGroup reviews all the documentation for accuracy with the required terms and conditions, to and ensure a trouble-free closing. DerivGroup checks the bank’s billing to make sure hedge payments are correct and answers any billing questions you may have.
Follow-Up Services
DerivGroup offers follow-up services, including ongoing valuation and Hedge Accounting journal entries, managing ongoing record-keeping, and documentation retention.
