Product description
As part of hedging against future unfavorable movements in interest rates, it is possible to use an interest option - buying or selling an option (right) to use the low or, alternatively, high level of the interest rate.
The CAP option determines the highest possible level of the future interest rate, the so-called CAP interest rate - similar to the agreed rate for the currency option.
- As part of hedging against rising floating interest rates on the existing loan, the buyer of the CAP is entitled to receive positive difference between the current fixing of the floating interest rate and the CAP rate (related to the pre-defined notional amount of the deal).
- • The seller of the CAP then has the obligation for the premium received to pay the difference between the current fixing of the floating interest rate and the defined CAP rate.
The FLOOR option, on the other hand, determines the lowest possible fixed interest rate, the so-called FLOOR rate.
- As part of hedging against decreasing floating interest rates on the existing deposit, the buyer of the FLOOR is entitled to receive for the premium paid in advance positive difference between the FLOOR rate and the current fixing of the floating interest rate.
- The seller of the FLOOR has the obligation for the premium received to pay the difference between the FLOOR rate and the current fixing of the floating interest rate.
Typically, interest rate options are not set up individually, but collectively for a number of expiration dates at a time.
Barriers can be added to the structure of a particular deal and thereby make the buyer’s option to exercise his right conditional upon achieving or not achieving the pre-defined level of the interest rate fixing.
Similarly, as in the case of currency options, also interest rate options can be put together into a zero-cost option structure in a way allowing you to pay no premium when you enter into these options, while meeting your requirements on hedging against the interest rate risk - whether an increase or a decrease in the exchange rates.
Terms of service
- Accounts in the relevant currencies (limited by the scope of the foreign exchange list of LBBW Bank CZ a.s.).
- The minimum notional amount is CZK 50,000,000 or an equivalent in a foreign currency.
- Master Agreement on Treasury Trades.
- Credit line designed for Treasury transactions.
