Caps and Collars
At KBC Bank Ireland we understand that you may be concerned about the possibility of interest rates fluctuating in the coming months and years. This will obviously make the cost of borrowing and debt more expensive at a time when most businesses can ill-afford added expense.
We are constantly endeavouring to offer our clients products that can guard against such volatility. One such class of product, available through our Treasury and Capital Markets division, are Caps and Collars.
A cap allows the client to benefit from falling interest rates, while at the same time remaining protected above a pre-agreed interest rate. By entering into a contract to buy a cap the client can predefine their exposure to rising rates. This is ideal for those clients who think interest rates may fall but who wish to remain protected against adverse movements if their view proves to be wrong.
The maximum loss to the client is the cost of the cap, i.e. the premium that the client pays up front. In return for the premium paid, the cap not only guarantees the client a maximum interest rate payable during the life of the transaction but allows the client to avail of variable rates up to the agreed cap level.
A collar works the same way as a cap but with an added feature built in - a pre-agreed limit to which interest rates can fall which is called a floor. This added to the cap creates the collar. This is usually a zero cost hedge. This product is generally more advantageous at high nominal interest rate levels.
Our experts in the Treasury and Capital Markets division will be very happy to discuss this product with you in more detail if it is something that you believe may be advantageous for your business.
