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About Interest Rate Swap
- Interest Rate Swap (IRS) is an agreement to exchange interest cash flows denominated in one currency based on a specified notional amount from a fixed rate to a floating rate (or vice versa) or from one floating rate to another
- Party A undertakes to pay fixed interest to Party B, while Party B undertakes to pay agreed variable interes to Party A
- Interest payments are derived from agreed principal, agreed interest rate, for the agreed period and as of the agreed due dates
- Variable interest rate is set two working daysbefore start of the interest period
- The fixed and floating interest rate payments are netted off against each other and only one payment equal to the difference is made at the end of the interest period
- The party with the higher swap interest rate payment due pays the other party
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Several product modifications are also available, such as:
- Nominal amount from which interest is calculated is reduced over the course of the contract term in a predefined manner
Step up IRS
- Nominal amount from which interest is calculated is increased over the course of the contract term in a predefined manner
- Amortised IRS
Interest rate swap cancellation:
- Counterparties may agree on swap cancellation in the course of the contract term
- When interest rate swap is cancelled all future liabilities are cancelled; interest payments made prior to swap cancellation are not refunded
- The one–off payment is a price at which both parties are willing to withdraw from the transaction
- Party in a position pays the agreed amount to the other party (swap market price)
- Any accrued interest payments outstanding on the swap cancellation date are included in the swap market price
Important information for you
- Profit or loss from interest rate swaps is affected by interest rate fluctuations
Our counterparties may encounter losses over the course of the cross currency swap. This occurs when i.e. the swap interest payment to be made by the counterparty exceeds the interest amount to be paid by the bank.
- In this case, the client pays a difference between the two interest payments to the bank
- In case the transaction was negotiated as a hedging instrument, this represents the cost of hedging
- Hedging protects clients from significant interest rate fluctuations that could otherwise result in their serious financial problems
- Bear in mind the consequences of negative interest rates. Under normal circumstances the hedger pays fixed and receives floating interest rate payments from the Bank. In case of negative market interest rates the fixed rate payer will have to both pay fixed as well as (negative) floating to the Bank.
Individuals and legal entities – domiciled both in the Czech Republic and abroad.
Interest rate swaps are used to hedge interest rate risk arising from adverse movements of interest rates.