• Interest Rate Option

    Hedge risk associated with interest rate fluctuations and enjoy possibility to profit from positive movement.

Security

Protect your business from adverse interest rate movements.

Profit

Enjoy security and profit from positive interest rate movement.

Tailored solution

We will propose suitable hedging strategy and provide you with implementation assistance.

Simple

Call our dedicated Sales dealer.

Why KB?

Be in control

You will receive confirmation for every executed transaction.

Simply choose

Simply choose the option type that best suits your needs.

Reliable partner

Benefit from a team of experienced professionals.

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Intended for

Clients who wish to hedge their interest rate risks associated with adverse interest rate fluctuations.

About Interest Rate Option

  • Options allow hedging of liabilities or receivables against adverse interest rate movements – in case of opposite movement in rates, you can make a profit
  • Options represent a right (not an obligation) to purchase or sell defined instruments on agreed dates. For interest rate options, such instruments most commonly refer to exchange of payments derived from agreed fixed rate for payments derived from current value of reference interest rate.
  • It is a unilateral transaction – payments on the part of the buyer are limited to the payment of the premium
  • There is no credit risk for the seller associated with the buyer following the premium collection
  • Clients with slightly worse financial standing may also act as buyers
  • Options are exercised automatically, provided the option is in-the-money from buyer’s perspective, i.e. the buyer is in the position of the recipient of pay–off from the option seller
  • There are usually multiple options purchased for several consecutive periods (caplets). In this instance the instrument is called cap, floor or collar
  • The premium is normally paid 2 business days after trade date
  • Maturity for caps, floors or collars usually varies from 1 to 5 years
  • Interest rate period is most commonly 3 months, but may also be 1 month or 6 months

You might also like to know

  • Basic option types are Cap and Floor:
    • Cap:
      • Series of European call interest rate options
      • Buyer hedges against rising interest rates (e.g. in case he has a loan with variable interest rate)
      • Payment is made, if a reference interest rate exceeds the agreed Cap rate as of the agreed exercise date
      • Payment amount is determined by the difference between current value of reference rate and cap rate as of the agreed exercise date – i.e. beginning of an interest rate period
      • Payment is made after the interest rate period, to which it relates

      Interest rate option – Cap

    • Floor:
      • Series of European put interest rate options
      • Buyer hedges against declining interest rates (in case he has variable–rate deposits)
      • It is the opposite to Cap
      • Payment is made, if a reference interest rate drops below the agreed Floor rate as of the agreed exercise date
      • Payment amount is determined by the difference between current value of reference rate and the floor rate as of the agreed exercise date – i.e. beginning of an interest rate period
      • Payment is made after the interest rate period, to which it relates

      Interest rate option – Floor

    • Collar:
      • Collar buyer acts simultaneously as a Cap buyer and Floor seller
      • Cap rate exceeds the Floor rate (interest rate swap exists when both rates are the same)
      • Collar buyer receives payments from the seller, if the reference interest rate exceeds the Cap rate at the agreed date
      • Collar buyer makes payments to the seller, if the reference interest rate drops below the Floor rate at the agreed date
      • Collar buyer hedges his variable–rate liabilities similarly as Cap buyer; however, Collar buyer pays lower premium overall because he pays Cap premium but also collects Floor premium
      • Collar seller hedges his variable–rate receivables similarly as Floor buyer; however, Collar seller pays lower premium overall because he pays Floor premium but also collects Cap premium

      Interest rate option – Collar

Important information for you

Risk

  • Profit or loss from interest rate transactions is affected by interest rate fluctuations
  • In case the price of an underlying assets changes adversely for the option buyer, the right is not exercised
  • Maximum loss for the option buyer is limited to the paid premium
  • Risk associated with sold options is much higher than for purchased options
  • Loss of the option seller may significantly exceed the received premium
  • In case an option is exercised, the seller undertakes to purchase or sell the underlying asset – even if the market price is very far from the strike price
  • In case the client already owns the underlying assets, which he undertook to sell, the risk is lower; however, if he does not, the risk is virtually unlimited
  • Selling (writing) of interest rate options are only suitable for experienced investors
  • Hedging protects clients from significant interest rate fluctuations that could result in significant losses