I. Introduction ICBC FX term interest rate range products include FX interest rate Cap option, FX interest rate Floor option and portfolio products.
FX interest rate Cap option: An option contract for the buyer (customer) to obtain a right after paying an upfront fee to ICBC. At the start of each or many interest periods, the agreed Cap rate is compared with the market interest rate applicable at that time (e.g. LIBOR). If the market rate is higher than Cap agreed rate, ICBC will pay the difference to the buyer. If market rate is lower than or equal to Cap agreed rate, no settlement takes place.
FX interest rate Floor option: An option contract for the buyer (customer) to obtain a right after paying an upfront fee to ICBC. At the start of each or many interest periods, the agreed Floor rate is compared with the market interest rate applicable at that time (e.g. LIBOR). If the market rate is lower than Floor agreed rate (strike price), ICBC will pay the difference to the buyer. If market rate is higher than or equal to Floor agreed rate, no settlement takes place.
II. Target Clients FX interest rate Cap options are for corporate clients in and outside China who wish to protect against rising interest rates under prevailing low market rate. FX interest rate Floor options are for corporate clients in and outside China who wish to protect against falling interest rates.
III. Functions and Features FX interest rate Cap options or FX interest rate Floor options are common derivatives, simple structure and easy to understand, very flexible, no other fees except the upfront option fee. Loss is only limited to option fees. They are primarily used by companies to manage interest rate risk, hedge against market risk due to interest rate volatility, and lock down financial cost or investment return.
IV. Advantages 1. Competitive product pricing: In terms of exchange rate quotes, ICBC has a team of experienced and professional traders, product designers and quantitative analysts, flexible pricing mechanism and strong competitive advantages against the peers.
2. Tailored product design: Very flexible design to meet the needs of customers and help customers lock down interest rate cost.
3. Ongoing dynamic management: ICBC provides regular valuation report on the product, and dynamic management services in line with the market movement and customer requirement.
V. Price ICBC prices quoted to customers after all market factors taken into consideration, and updated in real-time in line with the market changes.
VI. Service Channel and Hours Eligible corporate clients are welcomed to apply within ICBC banking hours for corporate services at any sub-branch or tier-2 branch authorized to trade derivatives.
VII. Steps 1. Assess the customer: ICBC will make an overall assessment on the customer (business nature, experience in trading financial derivatives, internal management and control) and recommend suitable products.
2. Sign master agreement: Customer has to sign necessary agreements with ICBC first.
3. Risk disclosure and sign confirmation letter: ICBC will make a statement on the risk involved (cash flow analysis, market value and factors, potential loss in market value). Customer must confirm in written and sign the confirmation letter.
4. Pay option fee: Customer must pay an option fee to ICBC at the start of the period.
VIII. Considerations A minimum of USD 2 million (or equivalent in other foreign currencies) is required.
IX. Risk Warning You may suffer loss (no gain or loss in option fee), if Cap agreed rate or Floor agreed rate is not higher or lower than strike price as expected. You should fully understand the terms and conditions in the agreement and make independent decision. Under no circumstance ICBC shall be liable for any loss due to force majeure or accidental events.
X. Example A company has a 5-year loan of USD 3 million at 3-month LIBOR rate, interest payment in every three months. The customer is worrying about the rising USD 3-month LIBOR rate. To avert this risk and make use of the prevailing low market rate, customer and ICBC enter an USD interest rate Cap option contract. The strike price is 3%. Customer pays the option fee to ICBC. ICBC agrees, if the 3-month LIBOR is higher than strike price 3% when customer pays interest, ICBC pays the difference to customer. Notional principal amount (USD 3 million) is used to calculate the interest by respective interest days. By entering the USD interest rate Cap option contract with ICBC, customer is able to lock down financial cost and protect against rising interest rates.
Note: Information herein is for reference only. Refer to the announcements and regulations of local outlets for further details. Industrial and Commercial Bank of China Limited reserves the final right of interpretation.