The forward and derivative products which will grow in usage and availability as a result of the euro
according to Irish banks. |
Average Rate Options This option gives the holder the right to receive on the expiry date, the difference between the strike price and the average of values set at fixed points in time during the life of the option.
Bankers Acceptances Time or sight drafts drawn on commercial banks by borrowers, usually related to a commercial transaction. The borrower is liable for payment, as is the bank, which is the primary obligor, to pay the draft at its face amount on the maturity date.
Barrier Options Options that are ended or created automatically when predetermined levels are exceeded.
Bond repo facilities A secured lending alternative to money market funding. Under ISMA agreements Government or Corporate bonds can be lent or borrowed for an agreed term at an agreed 'repo' rate.
Caps Contract whereby the maximum interest rate that the buyer pays is set for the life of the contract in exchange for the payment of an up front premium. This protects against rising interest rates.
Collars A product that combines a cap end collar into a single product, this sets the minimum rate and the maximum rate that the buyer pays
Commercial Paper Bank guaranteed euro (or legacy currency) denominated commercial paper for a broad range of maturities at competitive rates.
Credit derivatives The most common types of credit derivatives are made up of swaps, options and forward contracts. A premium is paid by one party in return for a payment subject to the reference credits, as specified in the initial contract, defaulting with regard to some stated 'credit event'. Typical 'credit events' may be bankruptcy or price decline.
Cross Currency Swaps Allow corporate treasurers to change the currency of assets and liabilities in an efficient manner.
Cylinder Options Locks in worst case scenario but leaves limited upside potential. The cylinder uses a maximum (ceiling) and a minimum (floor) interest rate. It can be used as a device for limiting the effect of interest rate movements on debt repayments. It allows the treasurer to hedge an underlying asset by limiting both gains and losses from currency fluctuations. Cylinders can be constructed in a manner that implies zero cost.
Embedded Options Opportunity to enter an Interest Rate Swap at an enhanced rate. The Interest Rate Swap will revert to the market rate under certain market conditions.
Equity derivatives A derivative instrument whose underlying instrument is an equity security or a stock index. Examples of equity derivatives include: stock index options, equity swaps and convertibles.
Euro Commercial Paper A short-term debt instrument with the period usually up to one year.
Euro Cross Currency Options Options available for corporates who have exposure against currencies other than the euro, USD, GBP, JPY, CHF.
Euro Deposit accounts The range of euro (or legacy currency) and foreign currency deposit accounts for all maturities from call to 1 year fixed (and longer on request) at competitive rates.
Deposit accounts Full range of euro (or legacy currency) and foreign currency deposit accounts for all maturities from call to 1 year fixed (and longer on request) at competitive rates.
Euro Medium Term Notes (MTNs) The Euro MTN market is growing in popularity among corporates due to its flexibility. It enables a corporate to establish a funding programme where anything from euro EUR5 million privately placed deals to public bond issues of several hundred million euros can be issued.
Floors A product that sets the minimum rate that the buyer must pay. This protects against falling interest rates.
Foreign Currency Options The right to buy/sell one currency against another at an agreed strike price. Options can be structured in such a way as to minimise or eliminate premium. The introduction of the euro has provided access to a large and liquid market and the cost and complexity of this instrument has been lessened.
Forward Foreign Exchange Agreement between two parties to exchange one currency for
another at some future date. At the time the agreement is made various terms are fixed including the amounts involved, the delivery rate and the rate at which the exchange is to be made. The arrival of the euro
has moved this product from the prohibitively
expensive to a viable option. Forwards are one
of the two great classes of hedging instrument, the
other being derivatives. A forward contract obligates one party to buy and the other party to sell a financial instrument, a currency, an equity or a commodity at a future date. Examples of forward-based contracts include forward contracts, futures contracts, FRAs and swap transactions.
Forward Rate Agreements (FRAs)
An off balance sheet instrument that allows
Corporate Treasurers to fix the rate of interest (for borrowings or deposits) out of a future date for a fixed period of time based on a notional principal amount. Compensation will be paid or received by comparing the FRA rate to market rates at the beginning of the fixed future period.
Interest rate options Provide a relatively inexpensive hedge to ensure your worst case rate for borrowing or deposits is protected. Euro Interest Rate Options are proving to be an increasingly attractive alternative for Corporate Treasurers.
Interest Rate Swaps Allows corporate treasurers the ability to 'swap' fixed interest rate payables or receipts for floating or visa versa provides a valuable tool in interest rate risk management.
Knock-in Option This is a standard option that is automatically created when the rate of exchange exceeds a pre-determined barrier during its life.
Knock-out Option A standard option that ends automatically when the rate of exchange exceeds a pre-determined barrier during its life.
Look-Back Options A look-back option gives the holder the right to choose, on the expiry date, the best available price (as strike price or as a rate of exchange) reached during the life of the option.
Margin Trading Offers the facility to leverage foreign currency trading positions by securing the facility against a margin call account. This product is best suited to those who have a thorough knowledge of the foreign currency markets and who accept the risks inherent in this product.
Non-Deliverable Forwards (NDFs) NDFs provide a mechanism to hedge some currencies which were previously considered 'unhedgeable' either due to the non-existence of a local forward market or limited foreign access to local currency markets. They are quite similar to a conventional outright forward foreign exchange contract with the forward date, rate and principal all agreed at the outset. However there is no physical transfer of principal in an NDF transaction. Settlement will be made in euros or another fully convertible currency to reflect the difference between the agreed forward rate and the actual exchange rate on the forward date.
Spot Foreign Exchange A foreign exchange transaction for delivery within two working days.
Swaptions The buyer's right, but not the obligation, to enter into an interest rate swap at a future date at an agreed rate in exchange for the payment of a principal.
Yield Enhanced Deposit The principle of this product is to enable investors to enhance the return on cash assets if a particular currency view is realised. This product offers a currency-linked opportunity to improve on available money market deposit rates. In all instances capital is fully protected.
Zero-Cost Collars A combination of Caps & Floors set at strike rates which result in no premium
being payable. |
|
| Article appeared in the April 1999 issue.
|
|
|
