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Dominion Gas Holdings, LLC—Anticipatory ...

Matos, Pedro, Maid...

Case

Dominion Gas Holdings, LLC—Anticipatory Interest Rate Hedging

Matos, Pedro; Maiden, Stephen E.

F-1754 | Published May 3, 2016 | 12 pages Case

Collection: Darden School of Business

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The case examines interest rate risk management at a U.S. utility company, Dominion Gas Holdings. In November 2012, as part of its new financing plan, it wanted to hedge the interest rate risk involved with the company's 2013 planned issuance of $1 billion in debt. While the coupon rates for the planned debt were unknown as of November 2012, the company wanted to lock in its financing costs one year ahead since interest rates were at historically low levels. The company was considering entering into a number of forward-starting interest rate swaps. The use of forward-starting interest rate swaps as a pre-issuance hedging tool could cause some accounting and regulatory risks, and some other utility companies chose not to hedge at all. A bank had approached Dominion Gas with an indicative quote for the forward-starting swap, and the Treasurer had to decide whether it was a fair rate. This case has been used in a first-year MBA class that focused on valuation of financial markets, and a more advanced second-year elective that focused on derivative securities.

The case is targeted at MBA students as an illustration of the use of interest rate derivatives for corporate hedging. The case can be used to pursue the following teaching objectives: ? Illustrate corporate hedging strategies. ? Cover the basics of interest rate hedging instruments and, in particular, swap contracts. ? Study the principles of arbitrage-free pricing of interest rate derivatives by pricing vanilla and forward-starting interest rate swaps based on Eurodollar futures contracts.