Agreement-swap basis

Option in interest rates - is an agreement that entitles the buyer to obtain a loan at a rate not to exceed a fixed upper limit, or the right investment at an interest rate not below the lower limit, at some future time or within a predetermined the period. Option seller sets the option premium, depending on the likely future trends in interest rates and duration of the interim period, which covers an option. If market interest rates on loans fall below the level recorded in the option or deposit rates rise above the rate of investment, fixed in the option, the buyer (owner) of an option does not exercise its right to seek a more advantageous way of financing. Options of interest rates in the mechanism of action and implementation are slightly different from other types of options and have separate titles, namely: CAP (Cap) FLOOR (navy) COLLAR (Kolar). CAP - a bilateral agreement that provides the buyer of the option the right to compensation in case of excess of market rates over the pre-fixed level of interest rates based on the notional amount for a certain period in the future. Interest CAP is used to protect the borrower, who borrows a floating rate of increase in market rates on the loan. As compensation for pre-paid option premium borrowers receive a guarantee that in case of increasing market rates above the level specified in the option, called SAR-rate, they will receive the difference between those rates based on the notional amount, and thus their effective interest rate will not exceed fixed in option rate. Category: Management Operations Commercial Bank