2. Interest Rate Swaps
(IRS) is a reference to
financial instruments known
as hedges
and derivatives.
To hedge something
is to evade or “dodge”
something.
3. When you hedge your bets you
are insuring yourself against
losing.
In essence that is what
an interest rate swap
is; it is a hedge against
the movement of
interest rates.
4. In its most basic form there is
a vanilla interest rate swap.
Like all interest rate
swaps, you “swap” interest
rates with the provider of the
interest rate swap.
5. One party (you, known as
counterparty A) will pay a fixed
rate.
Counterpart B
(the bank) will pay a
variable rate.
6. When interest rates (either Bank of
England base rate, your lending
bank’s base rate or LIBOR) go above
a predetermined Level Counterparty
B
(the bank) pays Counterparty A
(you) money.
7. When the rate fall below this
level Counterparty A will
pay Counterparty B.
8. The financial effect of this is that
you will have a fixed rate.
If interest rates increase above the
set rate the amounts
payable under the loan
will increase, but the
bank will compensate
you for it.
9. If the interest rates fall below the set
rate the amounts payable under the
loan will fall but you
will make up the
difference by paying
the bank under the
swap.
10. The net off-set of
payments means
that you will always
have the same
contingent liability
for the repayments
under the underlying
loan facility and
swap.
11. Interest rate swapping can then be
used in a many ways, limited only
by the imagination.
12. For a capped rate a ceiling limit will
be set. Counterparty A can then
benefit from interest rates
fluctuating, but will never pay
above the set rate.
13. That gives the ability
to enjoy rates
dropping, but always
knowing that you will
never pay above a
certain set interest
rate.
14. There can be a cap and a
floor, meaning that Counterparty A
can know for certain that they will
only pay a variable rate within set
parameters.
15. The interest rate can be set using a
variety of indicators including, but
not limited to LIBOR (the London Inter-
Bank Offered Rate),
Bank of England
base rate and the
Lending bank’s base rate.
16. Hedging can be very beneficial to
a business when used
appropriately.
However, they are very complex
financial instruments.
17. Choosing the right level to set the
rates means finding the perfect
balance.
18. If the rate is set wrong a
product designed to
help the business can
lead to, at worst, the
insolvency of that
business.
19. What the banks and
businesses alike did not
appreciate before 2008
was that interest rates
would drop to 0.5%.
20. It certainly could not have been
appreciated by anyone that
interest rates would remain at
0.5% for so long, and no-one
could have predicted the current
possibility of a further
drop to 0.25%.
21. A feature of some of the swaps is
that if the set rate fell below a
specified point, say 3%, then
Counter party A would pay Counter
party B additional sums.
This came as a surprise
to the parties subject
to these strictures.
22. While the rest of the country
benefited from cheaper lending
facilities businesses subject to these
kinds of swaps were being crippled
by increased payments.
23. Their businesses had been hit hard
by the deep recession but then
found that their cash flow was
taken up paying money to the
bank under the swap.
24. Whilst business was in
decline, those who were
bound by swap agreements
were having to pay
increased outgoings to their
banks.
25. As stated, “interest rate swaps” is a
term used to cover all swaps.
There are also LIBOR
swaps, knock in floor,
caps, structured collars,
debt default swaps,
foreign currency swaps
and many more.
26. If you have any kind
of swap
agreement, we can
assist you.
27. We have found that as a result of the
fall in currency levels clients
subjected to foreign currency swaps
have been unable to compete in the
market because they are fixed
in to a set currency
exchange rate, but the
cost of exiting the
Swap is large.
28. Contact Rate Swap Refunds
today for a no obligation
discussion, regardless the form
of swap you have.
29. RATE
SWAP
REFUND
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