Interest Rate Derivatives
When seeking ways to hedge your company's interest rate risk, look to First National Capital Markets. Interest rate derivatives offer clients innovative and effective ways of mitigating interest rate risk. FNCM offers these derivative products through our affiliate banks – with options for tailoring to your unique needs.
First we determine whether interest rate risk management products are an appropriate choice for your company. Our professionals can help you assess whether your company could benefit from an array of interest rate derivative and risk management products. If interest rate derivatives are appropriate, we can customize products from a variety of choices that best meet your company's needs.
Interest Rate Derivative Alternatives
Interest Rate Swap
An agreement between two parties to exchange one set of "variable" rate cash flows for another set of "fixed" rate cash flows. Parties agree to make payments on a notional principal amount. No actual principal payments are exchanged – only the relevant interest payments which accrue on the notional principal are exchanged on specified interest payment dates. There is no upfront premium paid by either party entering into a swap agreement.
Below is an economic cost/benefit graph of a Customer-Paid Fix Receiving Floating- Rate Swap:
Forward Interest Rate Swaps
One advantage to interest rate swaps is their ability to lock terms in advance. A forward interest rate swap is an agreement between two parties to exchange one set of "variable" rate cash flows for another set of "fixed" rate cash flows occurring sometime in the future. This process locks the fixed rate in advance of the actual effective date of the exchange of cash flows. Aside from the forward rate lock, it works identically to a regular interest rate swap.
Interest Rate Cap
An agreement under which the seller (typically the borrower) contracts to reimburse the buyer the interest expense above the specified "strike rate" for a stated period of time on an agreed upon notional amount. The buyer pays an up-front premium for this derivative. Below is an economic cost/benefit graph of a Customer-Bought Interest Rate Cap:
Interest Rate Collar
A combination of a Cap and a Floor that protects the upside against rising rates, but limits the benefits of falling rates in the case of a borrower. This is done at different "strike rates" for each the cap and floor for a stated period of time on an agreed upon notional amount. Unlike a single cap or floor, an up-front premium may or may not be required. Below is an economic cost/benefit graph of a Customer- Purchased Interest Rate Cap and a Customer- Sold Interest Rate Floor:
