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Chapter 13

Interest rate guarantees (IRGs)

3.1 Basic ideas

 IRGS are options on FRAs.

 Treasurer has the choice whether to exercise or not.

3.2 Operation

1. Now - set up the IRG.

 Call or put options? Borrowing – would buy FRA, so need a call

Depositing – would sell FRA, so need a put

 Everything else (dates, sizes) bespoke as OTC.

2. Future transaction date.

 Compare the IRG (option) rate with the prevailing spot rate and make
decision - to exercise or allow to lapse?

 Calculate receipt on FRA if necessary.

Illustrations and further practice

Now try TYU 3 in Chapter 13

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