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Hi John,
I want to ask you, could there be a situation where a Company is better off not hedging from either of interest rate futures,options and collars becasue all of these would increase the cost of interest to the Company overall?
The purpose of hedging is not to be better off – it is to remove the risk of interest rate movements.
If, for example, you use futures then the effective interest rate is fixed. If actual interest rates end up falling then certainly you would have saved interest by not using futures but you do not know in advance that they will fall – they could just as easily have increased!If you were pretty certain that interest rates were going to fall then you would probably use options – then you would get the benefit of a fall in interest but would be protected against you being wrong and the interest rate rising.
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