What is a common purpose of conducting a derivatives overlay in financial management?

The purpose of conducting a derivatives overlay in financial management is primarily focused on risk management, and managing interest rate risk is a key objective. A derivatives overlay involves using derivative instruments, such as interest rate swaps, options, or futures, to hedge against fluctuations in interest rates that could negatively impact the firm's financial performance. By strategically entering into these derivative contracts, organizations can stabilize their cash flows and reduce their exposure to potential interest rate volatility.

This is particularly important for companies with significant debt obligations or those that are sensitive to interest rate changes, as such changes can affect borrowing costs, investment valuations, and overall profitability. Effectively managing interest rate risk helps ensure that organizations maintain a balanced financial position and can plan more accurately for future cash flows.

Other options, while potentially related to derivatives in some contexts, do not encapsulate the primary purpose of a derivatives overlay in the same way. Enhancing cash flow and controlling leverage may be indirect effects of managing interest rate risk, while improving credit ratings deals with a broader financial standing that is influenced by various factors beyond just derivatives management.