A company with relevant exposure to interest rate risk needed to review whether the contracted coverages actually fulfilled their function: to protect financing without introducing additional risks. The objective of the assignment was to transform a complex operation into a clear reading for management: what was contracted, what implications it had, and how it impacted the financial management of the business.
At martinsdelima, we approach the case from a practical perspective: a swap is not a generic “insurance,” but a contract with flows and scenarios. That is why we analyze how an interest rate swap works, how it is negotiated (OTC market, with customized conditions), and what that means for transparency, comparability, and internal risk control.
From there, the focus was on suitability: we reviewed the contracting party’s profile, their real capacity to understand the product, and whether the information received allowed understanding critical elements such as risks, scenarios, and exit costs. In financial hedges, this part is decisive, because a poorly dimensioned hedge can become an under-hedge (does not cover) or a speculative position (adds volatility).
The next step was to quantify rigorously: we performed an economic valuation to understand the “market value” of the derivative and, above all, the cancellation cost, which is usually the most frequent blind spot in this type of operation. This analysis allowed explaining, with traceability, how the price is formed, what part corresponds to market conditions, and what part may respond to margins or cost structures integrated into the product.
In addition, the review included contrasting with good practices: we identified hedging alternatives that can manage the same risk with different profiles (for example, instruments with asymmetric protection logic or fixed-rate financing), so that the company could compare solutions and choose the one that best fits its operational reality and risk appetite.
The result was a highly actionable consulting report: a complete view of suitability, derivative economics, and alternatives, which allowed the company to regain control over its hedging policy, improve its negotiation capacity with financial entities, and establish clear criteria for future contracts.
Our methodology combined three layers, from the conceptual to the quantitative:
(i) Framework and operation of the instrument (what the swap is, how it is negotiated OTC, and what risks it implies).
(ii) Review of suitability and contracting governance, based on client protection regulations and the logic of suitability/appropriateness tests.
(iii) Financial valuation and exit costs, including valuation at market price, calculation of the cancellation cost, and analysis of the associated margin, with support from market sources.
The resolution was excellent because we united financial rigor with business utility: we not only explained the derivative, but we turned it into decisions. We clearly identified what risks were being assumed, how the relevant costs (especially cancellation costs) were constructed, and what alternatives existed to cover the same risk more efficiently. Thus, the company obtained a framework for improving its hedging policy, reducing uncertainty, and negotiating more strongly, with a traceable and perfectly defensible analysis before any internal stakeholder.