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I. Introduction
A buyer (customer) of FX interest rate Cap (terminated by cumulative return) obtains 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 based on the FX principal and interest calculation rules. Contract will be automatically terminated after reaching the cumulative return agreed. On any delivery date, when market rate higher than Cap agreed rate reaches the cumulative return as agreed, the contract will be automatically terminated. If market rate is lower than or equal to Cap agreed rate, no settlement takes place.
II. Target Clients
Corporate customers who wish to protect against rising interest rate to preserve value and reduce option fee expense under prevailing low market rate.
III. Functions and Features
FX interest rate Cap (terminated by cumulative return) includes a termination condition. It is a common derivative, simple structure and easy to understand, very flexible, no other fees except the upfront option fee. Option fee is lower than general FX interest rate Cap. It is primarily used by companies to manage interest rate risk, protect against rising interest rates to a certain extent, and lock down financial cost.
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 product design, the term and structure, depending on the requirement of customers.
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 is not higher than strike price as expected. Moreover, contract can be terminated in advance if the number of times when market rate higher than strike price reaches the number as agreed during the period. 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 current low market interest rate, customer has the intention to enter an USD interest rate Cap option contract, the strike price is 3%. But customer considers own situation and wishes to pay less option fee, so finally chooses to enter a USD interest rate Cap option contract (terminated by cumulative return) with ICBC. The cumulative return agreed is 2.3% of USD 3 million. 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. The option contract will be automatically terminated if ICBC payments to customer reach 2.3% of USD 3 million. By entering the USD interest rate Cap option contract with ICBC on the condition, customer is able to pay less option fee, lock down financial cost to a certain extent 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.
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