Strategy formulation begins with a clear understanding of a client's business plans, financing terms, interest rate risk tolerance, cashflow, view of market conditions, and income statement and balance sheet goals. An unbiased approach to strategy formulation can only come from an independent advisor and not from the hedge provider. Derivative Advisors responds to the client’s needs and creates strategies with the goal of minimizing risk and reducing interest rate expense.

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Below are some hedging tools clients are able to utilize:

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• Cap – An Interest Rate Cap provides protection against rates rising above the Cap rate while allowing the borrower to benefit from any decline in rates. An upfront fee is required for the product. There is no risk of prepayment penalty with a Cap and in fact a premium may by gained from the Cap upon an early unwind of the hedge. Indicative levels below are net of any bank or broker margins. 

 

• Collar - An Interest Rate Collar guaranties a borrower’s floating interest rate does not exceed a predetermined maximum Cap Rate and does not fall below a predetermined minimum Floor Rate. Collars can be structured without any upfront fees. Prepayment of a Collar may result in a prepayment cost, although the cost is generally less than for a Swap.

 

• Swap - An Interest Rate Swap efficiently fixes the loan floating rate at a competitive level with no upfront fee. Prepayment terms for a fixed rate Swap are considerably favorable to conventional loan terms.