Derivatives

• What is a Cap?

  An interest-rate cap is a hedging instrument giving protection against a potential rise in short-term interest rates. Caps are purchased against a premium and typically have tenors between 1 and 10 years. If short-term rates exceed preset strike levels, the cap holder receives a compensation payment for the period.

• What is a Floor?

  Interest Rate Floors have been used in floating interest rate investment strategies securing minimum return on a certain level if short-term interest rates fall below a pre-agreed strike level. Similarly to the Cap, the floor buyer receives a protection against premium payment. On the liability side, floors have been used in funding cost reduction strategies or cap cheapening. The most widely used strategy using floors is the so-called Interest Rate Collar (investment solution: collared floater).

• What is a Collar?

  A Collar is a hedging instrument consisting of two combined options. By using a Collar, the interest cost of an underlying transaction is being limited within a preset range. Hence, a Collar combines the results of both Cap and Floor.

• What is an Interest Rate Swap?

  Interest rate swaps represent a useful interest risk hedging instrument for more efficient asset and liability management of client’s balance sheets.