Derivatives & Interest Rate Risk Management

Manage risk smarter with our derivatives solutions

Our experienced team works with you to design hedging strategies that reduce exposure and create financial stability.

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What is a derivative?

A derivative is a risk-management tool that is a contract between two or more parties whose value is derived from an underlying asset, index, or rate. For example, an interest-rate derivative references a floating interest rate.

Interest-rate derivatives allow customers to proactively manage their exposure to a volatile rate environment. Because the derivative is a separate product from the underlying floating-rate loan, borrowers can separate interest rate management from other loan terms, properly forecast their interest expense, and manage cash flow from a position of certainty.

Interest Rate Swaps

An interest rate swap creates a synthetic fixed-rate loan by exchanging floating interest payments for a fixed rate locked in at execution. All transaction expenses are incorporated into the swap rate, making it a straightforward solution with no upfront cash cost.

Interest Rate Caps

An interest rate cap sets a ceiling on a customer's interest expense while allowing them to float beneath that rate, preserving the ability to benefit from falling interest rates. Caps do carry an upfront cash cost, which some customers choose to avoid in favor of a swap.

Interest Rate Collars

A collar combines an interest rate cap and an interest rate floor, often used to offset the upfront cost of a cap. The customer retains the cap to limit borrowing costs while selling the bank a floor to offset that cost. Unlike a swap, a collar gives the customer upper and lower bounds within which their interest rate can float.

Interest Rate Floors

An interest rate floor guarantees that the interest the bank receives will never fall below a set rate. When sold to the bank as part of a collar, the floor serves as a cost-offset mechanism, providing the bank with rate protection while giving the customer a more affordable path to managing interest rate risk.

Our approach to risk management

A derivative may be pursued at a customer's request or required as part of the overall commercial loan approval process. Either way, our derivatives team is committed to ensuring every customer has a clear understanding of their options and a solution that fits their unique financial circumstances.

Understanding Your Goals

A member of our derivatives team will meet with you to assess your overall risk management needs and gain a thorough understanding of your goals as they relate to interest rates and your loan structure.

Finding the Right Solution

Based on your risk tolerance and loan circumstances, our team will recommend the most appropriate risk management product for your situation, tailoring it to align with your individual goals and loan terms.

Walking Through the Details

We'll walk you through the mechanics, benefits, and risks of your chosen product and demonstrate how the derivative works in conjunction with your loan to achieve your desired risk profile.

When do you need derivatives?

Any business seeking a fixed rate or protection against interest rate volatility should consider a derivative product. These solutions are not designed to achieve the lowest possible rate. Rather, they are designed to provide certainty and predictability of interest expense. When possible, we recommend entering into a derivative at loan closing to maximize its benefit from the outset.

There is no perfect time to enter into a derivative as these products can strengthen your business regardless of the rate environment. Think of derivatives as interest rate insurance: the goal isn't to win, it's to not lose. Whether you're managing a specific loan, planning for long-term growth, or simply concerned about economic uncertainty, derivatives can be tailored to fit your needs.

Businessman reviewing his company's deriviatives options

Have questions about interest rate risk management?

If you'd like to speak with the Hancock Whitney team about derivatives or interest rate risk management, fill out the form and we'll get back to you promptly.

Frequently asked questions about derivatives

How does an interest rate swap work?
What does a “notional amount” mean in a derivatives contract?

The notional amount in a derivative is the nominal or face value of the financial contract, and it is used to calculate the payments. It’s often confused for the principal amount in a loan, which is used to calculate interest expense. Unlike the principal amount, which ultimately requires payback, the notional amount in a swap is purely used to calculate the fixed and floating payments, or “legs,” of the swap.
What is DV01 and why does it matter for hedging?

Manage risk smarter with our derivatives solutions

What is a derivative?

Interest Rate Swaps

Interest Rate Caps

Interest Rate Collars

Interest Rate Floors

Our approach to risk management

When do you need derivatives?

Have questions about interest rate risk management?

Frequently asked questions about derivatives

How does an interest rate swap work?

What does a “notional amount” mean in a derivatives contract?

What is DV01 and why does it matter for hedging?

Additional capital markets resources

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