ING in Russia

ING in Russia

Interest rate (IR) hedging

ING Bank capabilities:

  • Interest rate swaps (IRS), forward rate agreements (FRA), cross currency swaps (CCS).
  • Currencies: USD, EUR and RUB and more than 20 others.
  • Tenors up to 10 years (subject to market liquidity).

 

Trade pre-requisites:

  • Pre-settlement and settlement limits.
  • Agreement in place.

 

IRS

  • Agreement between two parties on exchange of interest rate payments for a pre-agreed period of time.
  • The contract allows to exchange floating rate into fixed and vice versa.
  • No exchange of principal is involved, as both legs are in the same currency.
  • Irrespective of the reference rate on the settlement date, the Buyer of IRS pays pre-agreed swap rate and The Seller pays the hedged interest rate.

 

Cross currency swap

  • Agreement between two parties about exchange of principal and interest rate payments for pre-agreed period of time in two different currencies.
  • Principal may be exchanged:
  • -at the beginning and in the end of trade;
    -only at the beginning;
    -only in the end;
    -no exchange of principal at all (exchange of interest payments only)
  • This trade allows exchange of cashflows (fixed or floating) in one currency into cashflows (fixed or floating) in another one.
  • Irrespective of the reference rate on the settlement date, the Buyer of the cross currency swap pays pre-agreed swap rate, and the Payer pays the hedged interest rate.

 

Credit contingent cross currency swap (CCCCS)

  • CCCCS also known as Vanishing Swap is intended to hedge the client's EUR (or USD) currency risk and interest rate risk, by swapping into local currency and local interest rate.
  • By making the swap credit-contingent (underlying reference entity is a sovereign), Clients pay a lower than market rate (discount) on the vanilla cross currency swap.

 

Key features:

  • Credit-contingent on sovereign;
  • Transaction terminates if and when sovereign default occurs;
  • Default must be a default under standard CDS language.

 

Benefits for clients:

  • Client pays lower interest rate compared to vanilla CCS.

 

Risks to clients:

  • In case the reference entity (usually a sovereign) defaults, the swap is terminated without settling unwind payments, as the result Client's FX position is unhedged.