^{Financial Markets Solutions} Interest Rate Hedging

FRAs are forward contracts in which one party pays a fixed interest rate and receives a floating interest rate equal to a reference rate (the underlying rate). FRA is a useful tool to hedge Working Capital facilities and short-term liabilities.

A vanilla IRS is a product that is used to hedge long-term loans against rising interest rates. The mechanics of the product are such that the client pays a fixed rate and receives the relevant floating rate equal to the reference rate (the underlying rate). Irrespective of the market rate, the client will continue to pay a fixed rate for the entire life of the trade. A vanilla IRS is a useful tool for long-term liabilities, where the interest rate is fixed and there is certainty on the cash flow for the tenor of the loan.

A cap is an option that provides protection to the client from rising interest rates, while still allowing the customer to benefit if rates fall. If the relevant interest rate rises above the cap strike, the client receives the difference between the interest rate fixing and the strike. The client pays an upfront premium for the cap. A floor is a product that enables clients to floor their interest rate receivables. ADCB pays the client the difference between the interest rate fixing and the floor strike if rates fix below the strike. The client pays a premium for the floor.

A KO swap is a structure that knocks out periodically if the relevant interest rate fix above a predefined barrier. The client is hedged against rising rates up till the KO rate, as they pay a fixed rate and receive floating. As the swap has the KO feature, the client pays a lower fixed rate than the vanilla IRS swap. This product is useful for a client who wants to fix the interest rate but has a view that the underlying rate will not go above the knock out rate.

A Callable Swap is an interest rate swap that can be called by ADCB at certain predefined dates during the life of the trade. The client is hedged against rising rates as they pay a fixed rate and receive floating. As ADCB has the right to call the swap at predefined dates, the client pays a lower fixed rate than the vanilla IRS.

This is an interest rate derivative structure in which the client receives a spread which is accrued based on a range or value of an index. The client is obligated to pay a fixed or floating rate. This structure can be tailored to meet specific requirements and can include additional features such as periodic calls as well.

This is a variation to the vanilla interest rate swap, which gives either the client or ADCB the right to extend the swap at the maturity of the trade. If the client has the right to extend the swap, the fixed rate that they pay is slightly higher than the vanilla swap rate. If ADCB has the right to extend the swap, the fixed rate that the client pays is slightly lower than the vanilla swap rate.

A CCS enables clients to swap strips of cash flows from one currency into another at future dates in order to match cash flows from/to underlying assets and liabilities. Both legs of the swap could be either fixed or floating. The FX rate on the initial, interim and final amounts is fixed in advance. The swap may or may not have an initial and final exchange, and this may impact the rate of the CCS.