We may use derivative instruments to manage exposure to variable interest rate risk. We generally enter into interest rate swaps to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the issuance of debt. These and similar hedging arrangements involve risks, including the risks that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that the amount of income we earn from hedging transactions may be limited by federal tax provisions governing REITs, and that these arrangements may reduce the benefits to us if interest rates decline. Developing and implementing an interest rate risk strategy is complex, and there can be no assurance that our hedging activities will be completely effective at insulating us from risks associated with interest rate fluctuations.
Additionally, in connection with our offering in January 2024 of 3.25% Exchangeable Senior Notes due 2029, we have entered into capped call transactions with certain option counterparties. The capped call transactions cover, subject to customary adjustments, the number of common shares initially underlying the notes. The capped call transactions are expected generally to reduce the potential dilution to our common shares upon any exchange of notes and/or offset any cash payments we are required to make in excess of the principal amount of exchanged notes, as the case may be, with such reduction and/or offset subject to a cap. The option counterparties are financial institutions, and we are subject to the risk that any or all of them might default under the capped call transactions. Our exposure to the credit risk of the option counterparties is not secured by any collateral. Global economic conditions have resulted in the actual or perceived failure or financial difficulties of certain financial institutions and could adversely impact the option counterparties’ performance under the capped call transactions. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to the termination amount at that time as determined pursuant to the capped call documentation with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of the common shares. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to the common shares. We can provide no assurances as to the financial stability or viability of the option counterparties.