You can also adopt a portfolio approach to your debt by using a combination of the products listed above - just as a property investor may invest in several different properties to diversify their risk. You can then spread your hedging across 2 or 3 products to achieve a more appropriate interest rate risk profile and repayment capability.
For example, the following portfolio provides an excellent degree of protection and flexibility.
| Product | % Portfolio | Value | % Floating | % Protection |
|---|---|---|---|---|
| Float | 20% | £2,000,000 | 20% | 0% |
| Swap | 40% | £4,000,000 | 0% | 40% |
| Collar | 40% | £4,000,000 | 40% | 40% |
| 100% | £10,000,000 | 60% | 80% |
The benefits of the portfolio approach are illustrated here:
Hedged
Unhedged
Hedged
Unhedged