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Derivatives

A Derivative instrument is defined as a financial contract whose value depends on the value of one or more underlying assets such as foreign exchange rates, interest rates, commodity prices, and equity.

Currently, we are offering 3 types of Derivative products.

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Products and Services

Interest Rate Swap (IRS)

Definition

An Interest Rate Swap is an agreement between two parties to exchange streams of cash flows over multiple specified interest periods, based on a notional principal amount.

Applications

	Under firmer interest rate scenario, a borrower with floating rate borrowings can use IRS to swap them into fixed rate borrowings and vice versa to reduce cost or hedge against interest rate risk.

	Under declining interest rate scenario, an investor may synthetically convert a floating rate asset into a fixed rate asset and vice versa to improve return or hedge against interest rate risk

	IRS can be used to better match interest payment dates for cash flow management purpose.

Forward Rate Agreement (FRA)

Definition

FRA is an agreement between two counter-parties to exchange a fixed interest payment for a floating interest payment, based on a specific notional principal amount, for a single specific interest period starts some time in the future.

FRA is transacted on notional principal amount basis, as the "physical" principal is not actually exchanged between the parties. Only the net difference between the contracted FRA rate and the prevailing fixing rate is paid by one party to the other.

FRAs are useful interest rate hedging tools used to manage short-term assets and liabilitites, which are exposed to short-term interest rate risk.

Applications

	Under firmer interest rate scenario, a borrower with floating rate borrowings can use FRA to fix future borrowing rate to hedge against interest rate risk.

	Under declining interest rate scenario, an investor with floating rate asset can use FRA to fix a future investment rate to hedge against reinvestment price risk.

Foreign Currency Option (FCO)

Definition

Currency Option gives the holder the right but not the obligation to sell/buy a currency against another currency in the future at a pre-determined FX rate (exercise price).

If foreign exchange rates move against you, you may exercise the option at the pre-determined exercise price. On the other hand, if foreign exchange raes move in your favour, you may just lt the option expire and contract at prevailing market rates.

Applications

Currency Options enable you to take a view on currency movements while protecting your downside risk.

	Hedging Foreign Exchange Exposure of Import/Export Customers may buy a currency call/put option to hedge against unfavourable movement in exchange rates while maintain the ability to benefit from favourable exchange rate movement.

	Lock-in" Minimum or Maximum Future Price A buyer of call option can lock in maximum buying price of a future foreign exchange rate. A buyer of put option can lock in minimum selling price of a future foreign exchange rate.

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