How do financials hedge against interest rate hikes?

Question

How do financials hedge against interest rate hikes?

Answer 1

By the use of interest swaps, a contract with an entity willing to take the floating rate risk.

In an interest rate swap, each party agrees to pay either a fixed or floating rate denominated in a some currency to the other party.

The most common rate swap is one where one party pays a fixed rate (the swap rate) to party B, while receiving a floating rate, usually a reference rate such as LIBOR.