WORKING CAPITAL FINANCING WITH COLLATERAL

Interest Rate Cap

Protect yourself from adverse interest rate hikes

The interest rate cap is a derivative financial instrument – an interest rate option or a series of interest rate options that protect the buyer against rising a certain reference interest rate index. The buyer of the option pays a premium when purchasing it. Usually, the term of the interest rate cap is from 1 to 10 years. Payments to the holder of the financial instrument are made on a monthly, quarterly or semi-annual basis, the periods corresponding to the maturity of the reference interest rate index. Each period, the payment is determined by comparing the current level of the floating reference rate with the exercise price (cap). If the floating reference rate exceeds the cap, the payment to the holder is based on the difference between the two levels, the maturity, the face value for the period and the interest rate convention. If the floating reference rate is below the cap, there is no payment for the period. The notional amount of the interest rate option is not exchanged during the term of the agreement. In combination with an asset, the interest rate cap can provide predictability of cash flows on exposure.

The reference interest index can be: Euribor – for transactions in EUR, Libor in USD – for transactions in USD, Libor in CHF – for transactions in CHF.

The frequency of payments depends on the maturity of the reference interest rate. For example, for one-month Euribor or one-month Libor, the frequency is one-month, and for three-month Euribor and three-month Libor, the frequency is three-month.



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Term of interest rate transactions: 

Usually, interest rate transactions are concluded for a period of up to 10 years.

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Currency: 

The currency of the proposed interest rate cap can be EUR, USD or CHF.

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Objectives: 

The interest rate cap is used to hedge interest rate risk.



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