Pricing of Contingent Interest Rate Hedges

Selim Toker

In this video, Selim talks us through a pricing example, discusses some practical considerations around the settlement of the product, and finally examines how the IRR of the trade is impacted by the IRDC hedge.

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Overview

We have introduced the IRDC product in the previous video. In order to match the financing strategy, IRDCs will either settle into a physical swap or be unwound at closing, each having repercussions with credit risks or cash availability respectively. The pricing for IRDCs differs from FXDCs given the complexity of the underlying project and how the pricing is represented, as demonstrated in a pricing example. In this video, we will discuss how to deal with credit issues in the case that a swap is physically settled, and discuss how a perfect interest rate hedge may not equate to a perfect IRR hedge.

Key learning objectives:

Understand the practical pricing considerations of an IRDC
Understand the different settlement complications of an IRDC contract
Comprehend the impact of an IRDC contract on the IRR of a project

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Summary

Expert

Selim Toker

After a 30-year career in Investment Banking, Selim Toker transitioned to the FinTech space and is currently the Chief Strategy Officer of incard, a digital banking and financial services platform targeting e-commerce and digital entrepreneurs. Prior to that Selim spent 17 years at UBS and 12 years at Nomura, focussed on derivatives advisory, structuring and marketing.