In the current interest rate environment, hedging is proving to be a particularly useful tool to secure the interests of both banks and borrowers: the forward rate lock (FRL) hedge. PCBB’s SVP of Hedging Solutions, Femi Audifferen, explains why now might be a good time for community banks to get started with this lending solution for new and existing loans. WHAT IS A FORWARD RATE LOCK HEDGE? A forward rate lock is an agreement between a borrower and a financial institution to set a fixed rate for future financing. While the FRL eliminates the risk of the borrower’s rate changing before financing begins, the hedge component (a forward rate swap) also ensures the institution’s loan pricing spread is preserved. FRLs are most often used to fix rates on permanent financing following construction and to fix future rates on existing resettable loans. These strategies are particularly useful when the yield curve is inverted or when rates have risen — both of these conditions currently exist. The forward swap rate for an FRL is calculated the same way a standard swap rate would be — averaging the projected rates of a specific pricing index (usually SOFR or the fed funds rate) over a specified term. The fundamental difference is that an FRL rate is calculated based on projected rates from a future date, which could be up to several years in the future. By Matt Helsing SVP & Northwest Regional Manager, PCBB, ICBC Associate Member IS IT TIME TO HEDGE INTEREST RATE RISK WITH A FORWARD RATE LOCK? 20 | INDEPENDENT REPORT
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