Interest rates swaps (IRS) are instruments for managing interest rates that allow safeguarding your company’s cash flow against interest rate fluctuations by swapping the floating rate for the fixed rate. This type of transaction can benefit companies that have long-term obligations with a floating interest rate.

Swaps may be used in combination with any financing irrespective of whether it’s from Swedbank or any other lender. Your loan will still be based entirely on the contract between you and your lender.

This instrument only affects the reference rate of your loan (such as EURIBOR, LIBOR). The entry into or termination of a swap transaction will not in any way affect the fees agreed in the loan agreement (e.g. for early repayment of loan or changes in repayment schedule) or any other arrangement between you and your lender.

Possibilities

• lock in the interest rate for the entire or any part of your loan period
• lock in the interest rate for the entire or any part of the amount of your loan
• lock in the interest rate on a new or an existing loan
• include your individual amortisation schedule
• alter, extend or terminate the interest rate swap transaction without any effect on your loan agreement

Advantages of insurance rate hedging

• greater certainty for future liabilities
• reduced credit risk and potential costs for the company
• no fees or charges

Interest rate swap transaction risks

• once the rate is locked in through interest rate swap, the company loses the chance to benefit from falling interest rates on the market
• in case of early termination of the transaction, the company may incur expenses or earn income, the size of which depends on interest rate market situation then prevailing

Requirements

• have a current account with Swedbank
• enter into Agreement for Financial Market Transactions with the bank
• enter into the Traderoom Use Agreement

Option transactions are entered into as a hedge against an unfavourable probable future event. The interest rate option gives the holder the right, but imposes no obligation, to pay or to receive a certain interest rate. The buyer pays the seller a premium to have such an opportunity. Interest rate indices such as EURIBOR or LIBOR are the most typical objects of insurance of this kind.

Interest rate option types

• A cap option entitles its holder to pay a certain interest rate, i.e. a rise in interest rates in hedged against
• A floor option entitles its holder to receive a certain interest rate i.e. a fall in interest rates in hedged against
• A collar option is a combination of cap and floor options where the main advantage is lower premiums

Possibilities

• increase certainty for future liabilities
• limit a potential rise in borrowing costs in case the interest rate hike goes beyond your target rate level, as well as benefiting from interest rate falls
• structure the transaction so as to avoid having to pay a premium at the time of entering into the transaction
• select a ceiling or floor level for the rate

Interest rate option transaction risks

• the paid premium will not be refunded even if the base rate does not reach the selected cap/floor level during the period covered by the transaction
• in case of early termination of the transaction, the company may incur expenses or earn income, the size of which depends on interest rate market situation then prevailing

Requirements

• have a current account with Swedbank
• enter into Agreement for Financial Market Transactions with the bank
• enter into the Traderoom Use Agreement

The risk of fluctuations in commodity prices can represent one of the key risks in various branches of economy. Commodity prices are affected both by supply and demand for actual end products and by manipulations of speculators in the commodities market. This risk notably undermines the ability of companies working in the affected industries to predict their future revenues and plan their budgets. One of the most effective solutions for minimizing the commodity price risk is risk limitation, or hedging, through standardized future contracts (futures) or commodity swap transactions (swaps).

Futures

A standardized future contract (a future) means an arrangement to sell or buy an asset on a specified future date. By entering into such a contract, your company can protect itself against unfavourable drops or surges in commodity prices.

The futures contracts are standardized and traded on stock exchanges. The contracts have a predefined trading currency (such as EUR, USD), amount (such as tonnes, pounds, barrels) and maturity (such as the first and the last trading day).

Swedbank offers futures traded at the following stock exchanges:

• CBOT, CME, CBOT, COMEX, NYMEX, EUREX, IPE, LIFFE, MATIF, NYBOT, LME.

Advantages of commodity price hedging

• better cash flow forecasting
• more efficient company budget planning
• the company can protect its business against unfavourable price fluctuations

Commodities the price fluctuation risk of which may be hedged through futures

• natural gas
• oil products (crude oil, diesel, black fuel oil, etc.)
• precious metals (gold, silver, platinum, etc.) and non-ferrous metals (aluminium, copper, etc.)
• agricultural produce (wheat, rape, soya, sugar, coffee, cocoa, etc.)
• other products

Risks of commodity price hedging

• suitable contracts are not always available (i.e. contracts with required dates or quantities)
• market prices of financial instruments may differ from commodity prices on actual markets
• once the price is locked in, the company can no longer benefit from favourable price rises or falls

Requirements

• have a current account with Swedbank
• enter into Agreement for Financial Market Transactions with the bank
• enter into the Traderoom Use Agreement

Collateral

The need for collateral is assessed on case-by-case basis and depends on the duration of transaction.