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Financial Hedging Products

Financial Hedging Solutions & Derivatives Explained

Below we have set out explanations of some of the more common hedging products used to counter interest rate, foreign exchange and commodity risk.

Interest Rate Swap

Vanilla interest rate protection that establishes funding costs.

An Interest Rate Swap is a forward contract between two counterparties, the Borrower and the Bank, to exchange future interest payments based on a pre-agreed amount.

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Interest Rate Cap

Protects the Borrower against rising interest rates but allows them to benefit if rates fall.

An Interest Rate Cap is a derivative product based on a contractual agreement between the Borrower, the buyer, and the Bank, the seller, to hedge against rising interest rates.

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Interest Rate Swap and Floor

A synthetic interest rate cap.

An Interest Rate Swap and Floor is a combination of an Interest Rate Swap with the purchase of an Interest Rate Floor.

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Participating Interest Rate Swap

A combination of Interest Rate Swap and Cap that combines fixed rate protection and flexibility.

A Participating Interest Rate Swap is a derivative instrument that combines an Interest Rate Swap with an Interest Rate Cap.

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Interest Rate Swaption

Offers the right, but not the obligation, to enter into an Interest Rate Swap at a pre-agreed rate in the future.

An Interest Rate Swaption is an option that provides the Borrower with the right but not the obligation to enter into an Interest Rate Swap on an agreed date(s) in the future on terms protected by the Swaption.

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Cancellable Swap

A Swap that provides the Borrower with the right to cancel at no cost on an agreed date in the future.

A Swap that is a combination of an Interest Rate Swap and a Receiver’s Swaption that may be cancelled by the Borrower at no cost on an agreed future date.

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Interest Rate Collar

Protects against higher rates of interest while allowing the Borrower limited flexibility to benefit from lower rates.

An Interest Rate Collar is an option used to hedge exposure to interest rate moves.

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Commodity Call Option

Protects the Buyer from rising prices while maintaining the ability to benefit from lower ones.

A Commodity Call Option is a contract granting the Consumer the right but the not the obligation to buy a specified quantity of a commodity from a Producer at a set price before a fixed future date.

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Commodity Put Option

Protects the Producer from falling prices while retaining the ability to benefit from higher ones.

A Commodity Put Option is a contract that grants the Producer the right but not the obligation to sell a specified quantity of a commodity to the Consumer at a fixed price before a stated future date.

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FX Forward

Vanilla protection against an adverse movement in foreign currency exchange rates.

An FX Forward is a contractual agreement between the Client and the Bank, or a non-bank provider, to exchange a pair of currencies at a set rate on a future date.

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FX Swap/Rollover

Facilitates the lengthening or shortening of an FX Forward.

An FX Swap/Rollover is a strategy that allows the client to roll forward the exchange of currencies at the maturity (settlement) of a Forward contract.

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FX Option

Protects the Holder against an adverse move in currency exchange rates while allowing them to gain from a beneficial one.

An FX Option is a contract that confers on the Holder the right but not the obligation to exchange an amount of one currency for another at a pre-agreed rate (strike rate) on or before a pre-agreed date.

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FX Collar

Protects the Holder against an adverse FX movement while maintaining limited ability to gain from a beneficial one.

An FX Collar involves buying a Cap and selling a Floor on the same currencies with the same expiration date. The two Options set the upper and lower strike prices.

Read more

Related insights

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