Illustrative Example: Risk Hedging – Effects of Fixed versus Floating Rates (Swaps)

File Name: Risk Hedging – Effects of Fixed versus Floating Rates

Location: Modeling Toolkit | Risk Hedging | Effects of Fixed vs Floating

Brief Description: Sets up various levels of hedging to determine the impact on earnings per share

Requirements: Modeling Toolkit

This model illustrates the impact to financial earnings and earnings before interest and taxes (EBIT) on a hedged versus unhedged position (Figure 2.24). The hedge is done through an interest rate swap payment. Various scenarios of swaps (different combinations of fixed rate versus floating rate debt are tested and modeled) can be generated in this model to determine the impact to earnings per share (EPS) and other financial metrics. The foreign exchange cash-flow hedge model (shown next) goes into more detail on the hedging aspects of foreign exchange through the use of risk simulation.

Figure 2.24: Impacts of an Unhedged Versus Hedged Position

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