Interest Rate Hedging: Interest rate has an impact beyond the debtor-to-creditor relationship;
• The whole economy
• Savings and investment amount
• Unemployment rates
• It is the main factor that affects all decision units in the economy simultaneously.
Interest Rate Hedging
Interest Rate is a starting point for valuing fixed income and risky securities.
The change in interest rate is the value of securities; therefore it affects the behavior of financial institutions, investors and firms.
It is the main component that affects interest saving. Because interest; is the reward for not consuming. In a normal economic conjuncture, as the interest rate (reward) increases, the savings increase; From another point of view, investments are expected to decrease.
Protection from Interest Risks
Products to reduce your variable interest rate risk: Interest Rate Hedging
• Interest Swap Transaction (IRS)
• Periodic Knock Out Swap
• Top Band (CAP)
• Zero Premium Tape Process
INTEREST SWAP PROCESS (IRS)
• IRS is the exchange of interest payments between the bank and the customer for pre-determined amounts and payment periods.
It is not necessary to have cash flow in our bank. Therefore, you can also make interest rate swaps for your loans in other banks.
• IRS can be used to hedge interest rate risk for all business loans, long-term loans, leasing and project financing transactions.
SWAP WITH PERIODIC KNOCK OUT
Content of the Transaction: If you think that 3-month Euribor will increase but will not exceed 5.00%, you can fix the variable interest from 2.50%. 2 business days before the beginning of each interest period, 3-month Euribor in the market is examined and payments are determined for that interest period:
• If 3 months Euribor is below 5.00%, you will pay 2.50%.
• If the 3-month Euribor is equal to or above 5.00%, you pay the rate valid in the market.
TOP TAPE (CAP)
Content of the Transaction: If you want to take advantage of the current low 3-month Euribor levels but you also want to be protected against the possibility of Euribor rising, you will purchase protection at 2.50% by paying 4.35% premium at the beginning of the transaction. 2 business days before the start of each interest period, the 3-month Euribor in the market is checked and payments are determined for that interest period:
• If 3 months Euribor is below 2.50%, you will pay the rate valid in the market.
• If 3 months Euribor is over 2.50%, you will pay 2.50%.
ZERO PREMIUM TAPE TAPE PROCESS
Content of the Transaction: If you think the interest rates will increase, you can buy protection at 4.00% without paying a premium, by using a different interest base for each year. 2 business days before the beginning of each interest period, 3-month Euribor in the market is checked and payments are determined for that interest period: 1 . For the year: • If the 3-month Euribor is below 1.40%, you will pay 1.40% • If the 3-month Euribor is between 1.40% and 4.00%, you will pay the 3-month Euribor which is valid in the market. you pay 4.00% if over 2. For the year: • If 3 months of Euribor is below 2.25%, you pay 2.25% • If 3 months of Euribor is between 2.25% and 4.00%, you will pay 3 months of Euribor, which is valid in the market. if over 4.00% you pay.
• You do not pay any premium for this transaction. However, when you buy CAP, you will have to pay a premium.
• Even if the interest rates are below the baseline rates, the minimum interest (subband rate) you will pay will be lower than the 2.90%, the interest you will pay when you make a classic swap.
• If the interest rates are below the lower levels stated in the example, your interest cost will remain higher than the market rates.
Interest Rate Hedging