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Hedging Products

Financial Hedging Solutions & Derivatives Explained

Below we have set out explanations of some of the more commonly used hedging products for interest rates, foreign exchange and commodities.

Interest Rate Swap

Vanilla interest rate protection that fixes funding costs.

An Interest Rate Swap is a contractual agreement between two counterparties, the Borrower and the Bank, to exchange interest payments on a pre-agreed profile.

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Interest Rate Cap

Protects against rising interest rates but allows the Borrower to benefit if rates fall.

An Interest Rate Cap is a contractual agreement between two counterparties, the Borrower, which is the buyer, and the Bank, which is the seller.

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Interest Rate Swap and Floor

A synthetic interest rate cap.

An Interest Rate Swap and Floor is a combination of an Interest Rate Swap with the purchase of an Interest Rate Floor.

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Participating Interest Rate Swap

A combination of swap and cap, combining fixed rate protection and flexibility.

A Participating Swap is a contractual agreement between two counterparties, the Borrower and the Bank, to exchange interest payments on a pre-agreed profile.

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Interest Rate Swaption

Offers the right – but not the obligation – to enter into a swap at a pre-agreed rate in the future.

An Interest Rate Swaption is an option which provides the Borrower with the right but not the obligation to enter into an Interest Rate Swap on an agreed date(s) in the future.

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Cancellable Swap

A Swap that may be cancelled by the Borrower at no cost on an agreed date in the future.

A Swap that may be cancelled by the Borrower at no cost on an agreed date in the future. It is structured as a combination of an Interest Rate Swap and a Receiver’s Swaption, where the cost of the Swaption is embedded into the fixed rate of the Swap and the Swaption’s strike is chosen such that it is the same as this fixed rate.

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Interest Rate Collar

Protects against higher rates while allowing the Borrower limited flexibility to benefit from lower ones.

An Interest Rate Collar is a contractual agreement between two counterparties, the Borrower and the Bank.

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Commodity Call Option

Protects the holder from higher prices while maintaining the ability to benefit from lower ones.

A Commodity Call Option is a contract that grants the Consumer the right but the not the obligation to buy a specified quantity of a specified commodity from the Producer, at a fixed price, on a stated future date.

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Commodity Put Option

Protects the holder from lower prices while retaining the ability to benefit from higher ones.

A Commodity Put Option is a contract that grants the Producer the right but not the obligation to sell a specified quantity of a specified commodity to the Consumer, at a fixed price, on a stated future date.

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FX Forward

Vanilla protection against an adverse FX movement.

An FX Forward is a contractual agreement between two counterparties, the client and the Bank, or other non-Bank provider, to exchange physical amounts in different currencies at a single set date in the future and at a set rate.

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FX Swap/Rollover

Facilitates the lengthening or shortening of an FX forward.

An FX Swap (or rollover) is an FX strategy that allows the client to roll forward the actual exchange of currencies at the maturity (settlement) of a forward contract.

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FX Option

Protects against an adverse FX movement but allows the holder to gain from a beneficial one.

An FX Option is a contract that confers on the holder the right – but not the obligation – to exchange an amount of one currency for another at a pre-agreed rate (the ‘strike’ rate) on a pre-agreed date.

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FX Collar

Protects against an adverse FX movement while maintaining limited ability to gain from a beneficial one.

An FX Collar is a combination structure that involves buying a protective, out of the money option and simultaneously selling another out of the money option on the same notional amount, but with opposite polarity.

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