With interest rates near all-time lows, many companies are starting to worry about the effectiveness of their current hedges when they aren’t perfectly matched to the underlying debt, while others are looking to lock in the favorable rates by entering into hedges or extending the length and/or amount of hedge coverage for existing hedges.
Under stable market conditions, most corporate foreign currency hedgers have a “set it and forget it” hedge strategy. Whether it’s cash flow or net investment hedging, once the hedges are in place, the majority of companies hold onto their derivatives through maturity. It’s an understandable practice as the best hedgers usually deliver currency against their hedges. This preserves the hedge rate in margin and converts cash at the same hedge rate.
Many companies will be affected by a global pandemic (should it come to fruition)—and a number are already being affected just by the containment efforts.
On March 3, 2020, the Federal Open Market Committee (FOMC) made an emergency 50bp interest rate cut in response to the Coronavirus’ impact on the U.S. economy.
LIBOR is being phased out through 2021, and the Secured Overnight Financing Rate (SOFR) was selected as the preferred LIBOR replacement by the Alternative Reference Rates Committee (ARRC) in June 2017.
As LIBOR is phased out, reference rate reform will identify new and alternative reference index rates for financial instruments, including the Secured Overnight Financing Rate (SOFR).