An interest swap allows you to swap a variable-rate loan to a fixed-rate one or vice versa without amending the loan contract. With an interest swap you can hedge the interest-rate risk of both current and future cash flows.

Interest swaps are equally suitable for hedging the risk of future interests received or paid, which makes them useful with respect to loans, deposits and government securities alike. 

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An interest rate option provides total protection against unfavourable interest rate shifts. At the same time it allows you to fully benefit from favourable rate changes. It is a tool for hedging the interest rate risk of both loans and deposits. Interest rate options are separated from the underlying instruments and the parties only settle the interest rate difference.

there are two kinds of interest rate options:

• cap option bought: protection against rising interest rates when you are in a debtor position. If on the rate-fixing date of the interest period the market rate is higher than the rate cap the Bank will pay you the extra interest incurred at the end of the interest period. If the market rate is lower than the rate cap (strike) nothing happens.
• floor option bought: protection against falling interest rates when you are in a depositor position. If on the rate-fixing date of the interest period the market rate is lower than the rate floor the Bank will pay you the interest lost at the end of the interest period. If the market rate is higher than the rate floor (strike) nothing happens.

A collar is the combination of a cap option and a floor option. You buy an option that protects you against the kind of interest rate movement which is unfavourable to you and simultaneously sell an option that limits your ability to benefit from the kind of interest rate movement which is beneficial to you, thereby making the arrangement cost-free.

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Compared with interest rate vanilla options an interest rate barrier option provides more cost-efficient protection against unfavourable rate shifts. In exchange for the lower option premium, however, the protection is only partial.

The barrier is in effect a pre-defined interest rate the touching of which triggers a pre-defined action: e.g. the option is activated or extinguished.

the barrier can be: 

• European style: if it is reached only the current interest period is affected

• American style: if it is reached all the remaining interest periods are affected

The European barrier is much more common in the interbank market and therefore we offer this to our clients too.

another way to classify these options is according to what happens when the barrier is touched:

• European knock-in: if the barrier is reached the underlying caplet or floorlet is activated for the current interest period

European knock-out: if the barrier is reached the underlying caplet or floorlet is cancelled for the current interest period 

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To understand the exchange-rate risk associated with a foreign currency loan one must be clear about the connection between the disbursement and repayment of foreign currency loans and exchange rates.

e.g.: EUR/HUF currency pair:

• EUR-denominated loan with disbursement to a HUF account = EUR sale (from the exporter’s point of view)
  • EUR/HUF buy rate from the Bank’s perspective
• repayment toward a EUR-denominated loan from a HUF account = EUR purchase (from the importer’s point of view)
  • EUR/HUF sell rate from the Bank’s perspective

dual-currency loans – benefiting from exchange rate shifts, hedging exchange-rate risk

Loans available in more than one currency are beneficial for companies that wish to change the currency of their loan to another currency in which they also earn revenue. The conversion of the loan in such cases does not go contrary to the underlying exposure because it results in another kind of natural coverage provided that the company earns enough revenue in that currency. Another reason may be to decrease the interest costs at the expense of running higher exchange-rate risk. In such a case the company not only chooses a more advantageous benchmark rate but can also benefit from exchange rate shifts by converting the loan. 

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