Business Clients Interest Rate Cap

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.

Term of interest rate transactions:

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

Currency:

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

Objectives:

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

Target market of the product

The Interest Rate Cap is a financial instrument, which the Bank manufactures and distributes as a product. The table below sets out the criteria for determining for which client profile the product is compatible with or not.

	Positive	Negative
Type of clients	each client with a credit a credit exposure of at least 3 years
Clients’ knowledge and experience относно	- the movement and the possible expectations regarding the hedged reference values; - lost profits or realized losses related to a negative change in reference values for the client when in Interest Rate Collar transaction and Reverse Interest Rate Collar transaction; - hedging the cash flows by buying Interest Rate Cap, Interest Rate Floor or Interest Rate Collar transaction and Reverse Interest Rate Collar, combined with Interest Rate Swap related to the interest payments of the client on a credit exposure; - maintenance of collateral required when concluding an Interest Rate Collar transaction; - cost management and limited protection in the cap spread rate and the floor spread rate strategies	does not meet the indicated knowledge and experience requirements
Clients’ financial situation with a focus on the ability to bear losses	- to suffer a negative result from the periodic netting payments on Interest Rate Collar transaction within the maturity of the instrument; - the existence of a credit exposure hedged with an Interest Rate Cap, Interest Rate Floor or Interest Rate Collar and Reverse Interest Rate Collar, combined with Interest Rate Swap; - ability to pay a premium in advance for the option or the option strategy
Clients’ risk tolerance and compatibility of the risk	if the objective is hedging, the client's risk appetite will not be considered	inclined to bear the risks of negative deviations of the reference values in the presence of a long-term loan or if they do not have a credit exposure
Clients’ objectives and needs	to hedge an exposure