Hedge mark-to-market (MtM) is the process of calculating the current market value of an interest rate derivative — such as an interest rate swap or interest rate cap — based on prevailing market rates. For a swap, the MtM represents the present value of the difference between the fixed rate you locked in and the current market rate for a swap with the same remaining term. If you entered a swap at 3.50% and rates have risen to 5.00%, your swap has a positive MtM (an asset) because you locked in a below-market rate. Conversely, if rates have fallen, your swap has a negative MtM (a liability). For caps, the MtM reflects the remaining optionality value of the cap given current rates, volatility, and time to expiration. Mark-to-market valuations are required for financial reporting, loan covenant compliance, and decision-making around early termination.
How It Works in Practice
Hedge mark-to-market values are not static — they change every day with interest rate movements, changes in forward rate expectations, and the passage of time. For CRE borrowers with interest rate swaps, a negative MtM means you would owe the bank a termination payment if you wanted to exit the swap early (for example, to refinance or sell the property). This termination cost can be substantial — a swap with a negative MtM of $2 million is effectively an additional prepayment cost that must be factored into any refinancing or disposition analysis. For caps, the MtM tells you the residual value of your cap, which matters when deciding whether to sell a cap back before expiration during a refinancing event. Many borrowers don’t monitor their hedge MtM regularly, which leads to sticker shock when they need to exit. LoanBoss provides daily hedge mark-to-market valuations across your portfolio, powered by Pensford’s institutional-grade rates data, so you always know your exposure.
Related Terms
Part of the LoanBoss CRE Debt Glossary. For hedging-specific terms, see Pensford’s resources.