We are a borrower with a construction loan that is pay floating. At the inception of the loan, we entered into a pay-fixed/receive-floating interest rate swap with a growing notional profile that aligned to the original forecast of construction draws. The total cost of the contract is capped at 100MM (i.e. I know the total notional will never grow to more than 100MM). Our loan requires us to stay within 90% and 100% notional hedging.
The project (managed by a third party) is now accelerating, requiring faster drawdowns than originally contemplated. It may accelerate further.
As I think about how to enter into a second layer of swaps to deal with this adjusted drawdown profile, I've started to wonder what the "optimal" notional profile is for this second swap, given a distribution of possible notional amounts/timings.
What is my "optimization model" concerning the management of my interest rate swap "portfolio" in the context of uncertain notional amounts (i.e. the timing of the construction loan drawdowns)?