An interest rate risk management tool enables a company to efficiently manage its interest rate cost and improve its financial planning.
Allows borrower to convert the loan's type of |
Allows borrower to hedge against rising interest rates within a set limit |
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(Interest Rate Swap) |
(Cap) | |
Variable Rate to Fixed Rate |
Fixed Rate to Variable Rate |
A company that has borrowed at a variable rate and that expects rates to rise can purchase a cap, which functions as insurance against higher interest costs up to the insured rate level. |
The borrower expects interest rates to rise and attempts to reduce cost by locking in the current rate. |
The borrower expects interest rates to fall and so converts a loan to variable rate in order to reduce cost. |
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Advantage Opportunity to reduce interest burden |
Advantage Highly flexible, allowing client to choose whether to acquire the right for interest rate risk protection or not. |
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Limitation Potential loss if reference rate falls in the future
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Limitation Potential loss if reference rate increases in the future |
Limitation Client must pay a set fee, due upon signing of contract |
Remark: Client may choose an interest rate swap without terminating the existing loan contract. |
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