Products for hedging interest rate risk
Interest rate swap
This refers to a transaction wherein one party pays (once or periodically) floating amounts in a specified currency calculated using an established floating interest rate from a notional amount in such currency and the other party pays (once or periodically) fixed amounts in the same currency calculated using a fixed interest rate in relation to the same notional amount.
Interest rate option
This refers to a transaction wherein the seller of the option pays (once or periodically) floating amounts in a specified currency calculated from a notional amount in the same currency and from the difference between the floating interest rate and the limit interest rate.
Forward rate agreement (FRA)
This refers to a transaction wherein one or the other party pays (once or periodically) floating amounts in a specified currency calculated from a notional amount in the same currency and the difference between the floating and fixed interest rates.
Binary interest rate options
This refers to a transaction wherein the seller of the option pays (once or periodically) fixed amounts in a specified currency calculated from a notional amount in the same currency and a pre-defined payout, depending on the ratio between the floating and fixed interest rates.
Combined products
This group includes, for example, the following:
Double rate corridor swap
This refers to a transaction that combines an interest rate swap and two binary interest rate options (binary cap and binary floor). This relates to a zero cost option strategy that effectively reduces the fixed rate of an interest rate swap and locks in the client’s maximum interest costs.
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