WORKING CAPITAL FINANCING WITH COLLATERAL

Interest Rate Collar

Guaranteed protection within pre-set interest rates

The interest rate collar is a derivative financial instrument in which one party simultaneously buys an interest rate cap and sells an interest rate floor. By buying the interest rate cap, the client receives protection from an increasing reference interest rate index, and by selling the interest rate floor, the premium for buying the product decreases. The sale of the interest rate exposes the client to the risk of a decreasing reference interest rate index. When the reference interest rate index is higher than the interest rate cap level, the client receives the difference between the two levels. When the reference interest rate index is lower than the interest rate level, the client pays the difference between the two. In case the reference interest rate is between the two levels, the two parties have no obligations to each other. All payments take into account the notional principal for each period, the length of the period and the interest rate convention. The client pays a premium in advance for the interest rate collar. In a separate case, depending on the levels of the interest rate cap and the interest rate floor, the client may not owe a premium.

The reference interest rate index can be: Euribor – for transactions in EUR.

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 collar can be EUR.

Objectives:

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

Target market of the product

The Interest Rate Collar 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 exposure of at least 3 years
Clients’ knowledge and experience	- 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 on periodic netting payments on Interest Rate Collar transaction within the term 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