Overview of Risk Management Products

Hedging Products Through IFC

IFC is one of the few organizations prepared to extend long-maturity risk management products to clients in emerging markets. Our risk management products, or derivatives, are available to our clients solely for hedging purposes. By allowing private sector clients in the emerging markets to access the international derivatives markets in order to hedge currency, interest rate, or commodity price exposure, IFC enables companies to enhance their creditworthiness and improve their profitability.

IFC's role is to bridge the credit gap between its clients and the market, offering clients access to products which they may not have on a direct basis due to credit or country risk. In offering risk management products, IFC acts generally as an intermediary between the market and private companies in the emerging markets. Since the inception of this program in 1990, IFC has transacted risk management products for about 60 clients in 30 countries.

IFC's Comparative Advantage

IFC is in a unique position to offer companies in developing countries a broad range of financial risk management products. Some of the benefits we provide include the following:

• Ability to take long term credit risk of emerging market clients.
• A triple-A rating, allowing access to the global financial markets on the most favorable terms.
• Extensive market relationships.
• Technical and legal know-how in the area of financial risk management, arising from the extensive use of derivative products in IFC's own financial operations, such as funding, liquid asset management, and asset liability management.
  

Illustration of Hedging Interest Rate Exposure

IFC offers clients products available in the international financial markets. In this example, a power company in a developing country is going to arrange a long-term contract with the local government. Under the terms of the contract the company is to receive a fixed amount of dollar revenue; however, the majority of its long-term financing is on a floating interest rate basis tied to LIBOR.

The company can protect itself against interest rate volatility by executing an interest rate swap with IFC, where the company pays a fixed rate to IFC and receives a LIBOR-based floating rate. The diagram below shows the cash flows associated with such swaps. Since the company's debt service on its floating-rate loan is matched by the floating-rate cash flow received from IFC under the swap, the company is left with a fixed-rate obligation. As a result, the interest rate swap has effectively achieved fixed rate funding for the company, matching its fixed dollar revenues under its long-term contract.