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