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Branches and cashpoints

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Derivatives

Interest rate cover: caps, floors, collars...

  • CAP: financial instrument which, in exchange for a premium, sets a ceiling for the interest rate for variable rate financing. When interest rates rise above the CAP level, the variable rate for the company’s financing becomes a fixed rate for the next loan period.

    However, when the interest falls below the CAP level it becomes a variable rate once again.

  • FLOOR: financial instrument which, in exchange for a premium, guarantees the purchaser a minimum profitability level.

  • COLLAR: combination of CAP and FLOOR. The purchaser of a COLLAR sells a FLOOR which totally or partially compensates the cost paid for the CAP. A company which is financed at a variable rate with the COLLAR they have purchased (purchase of CAP + sale of FLOOR) is protected, with low or nil cost, against a possible rise in interest rates in exchange for forgoing the potential profit they would obtain from a possible drop in rates under their FLOOR level.

Interest rate swaps:

  • SWAP: is an exchange of payment obligations generated by some interest rates during a period of time, from the shortest terms (week, fortnight, etc. in the case of Call Money Swap) up to longer terms (20 years).

    It typically involves exchanging a fixed interest rate for a variable rate (IRS) or vice versa, to adapt to each company’s balance structure. The interest flows to be charged or paid can be converted into a variable rate (minimising the risk of exposure to movements of these rates) or a fixed rate (stabilising the structure of these flows, eliminating uncertainties).

    The charges or payments are calculated as the difference between these exchanged rates and the main sum for calculation is not moved.


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