Thanks to the investor

Feature of the agreement FLOOR is that such protection from fluctuations in market interest rates need not only investors but also creditors, there is a banking institution, while buyers of CAP agreements is part of the borrowers - the bank's clients. Providing the customer with a loan at a floating interest rate, the bank is interested in guaranteeing a minimum annual return on this type of asset. In this case, the bank may purchase agreement FLOOR, to get right even in periods of significant downturn in interest rates to earn income on the loan is not fixed in the agreement below FLOOR level. For such a right bank pays the option premium. Thus, the agreement helps the bank FLOOR hedge against the risk of falling income lending. For the contractor who sold FLOOR, the benefits of the agreement are determined by the ratio of option premium received and paid by the bank's estimated total. COLLAR - an agreement that provides for a combination of CAP and FLOOR agreements and is used in order to protect the borrower in a floating interest rate of their increase in value is lower than the cost of conventional CAP. To receive this? Protection as COLLAR, the borrower buys CAP with set maximum limit above the current rates, and FLOOR with a specified lower limit, is usually lower than current rates. As is usual with CAP, COLLAR protects the borrower from increasing interest rates. However, if rates will be below the minimum limit specified in the agreement, he will be forced to pay the difference between the lowest market rates and the minimum level laid down in the agreement. After all, the agreement obligates the counterparty FLOOR-buyer compensate the reduction in the current market rates below the level that can lead to financial losses. By entering into an agreement COLLAR, the borrower makes the minimum and maximum CAP FLOOR as the limits of its interest expense and, therefore, can more accurately plan their activities. Thus, the agreement is a tool for simultaneous COLLAR insurance interest rate risk of both contracting parties: the borrower is insured against rising interest rates and lender - to reduce the profitability of their assets. COLLAR Agreement may be accompanied by actual operation of the loan or be separated from the credit, but in both cases, the parties agree to exchange only the difference in interest rates. Category: Management Operations Commercial Bank