Banks and companies unfortunately have no control over interest rates. The only real difference between a bank and a company is that a company can plan for their borrowing requirements, whereas banks are at the mercy of the demand for credit. One way to reduce risk is to build flexibility¹ into the operation. The other way is through hedging. Hedging is a way of reducing some of the risks involved with borrowing and investing. Generally in a market where interest rates fluctuate occasionally, there is usually little concern about funding risk or the need to consider hedging. This is because the certainty that hedging brings to the borrower also comes at a cost. In simple terms, a company should regard hedging as an insurance policy on their funding rate. One part about hedging that is often misunderstood, is that hedging is to reduce risk; it is not about making money. The main risk to a borrower is that the cost of borrowing may become higher than they can handle. To further illustrate² this point, if a company made a good profit in one year because interest rates fell by 1%, what may have happened if they went up by 1%??This is where hedging can help.