Interest Rate Swap

An Interest Rate swap is a very common Interest Rate Derivative, and a good way for businesses to manage their debt. As its name suggests, an Interest Rate Swap occurs between two parties ‘swapping’ fixed and floating interest rates to mutual benefit. One operates at a fixed rate and the other on a floating rate in order to net payments and reduce risk.

An Interest Rate Swap can be beneficial when a company wants to receive payments with a floating interest rate (to take advantage of market fluctuation), while another prefers to hedge its risk by making fixed payments. The length and term of the swap is agreed upon in advance.

Interest Rate Cap

An Interest Rate Cap is the agreed upon limit to which an interest rate may be increased. It provides a level of protection to a company with a floating rate loan. The cap acts as a ceiling, indicating the highest rate which you will pay in the event of an upward fluctuation in the market.

Interest Rate Collar

An Interest Rate Collar protects borrowers against fluctuations-both up and down. It sets both a Cap on increasing interest rates, as well as a floor on declining interest rates. It’s an investment strategy that will hedge your exposure to interest rate fluctuations.