Hedging Video Series: “Interest Rate Swap” [Chapter 5].
What is an Interest Rate Swap? When you are a commercial real estate borrower and you execute a floating rate loan, the interest you have to pay on that loan is LIBOR plus a spread. That spread is known and fixed, but LIBOR is variable. To mitigate that risk, the borrower can enter into a separate transaction called an interest rate swap, and in that transaction they are receiving LIBOR and paying a fixed swap rate. So the LIBOR that they are receiving on the swap can offset the LIBOR they owe on the loan. So synthetically they create a fixed rate certainty because they are left paying the spread and the fixed swap rate.
This is the fifth video — focusing on, “Interest Rate Swap” — in a series of eight episodes on the topic of Hedging presented by Jillian Mariutti.