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     -  Business Profile
     -  FX Interest Rate Swap
     -  Forward FX Interest Rate Swap
     -  Progressive FX Interest Rate Swap
     -  FX Interest Rate Swap under Remittance Payment Link
     -  FX Term Interest Rate Range Products
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  Home Page > Corporate Banking >Financial market >Corporate Risk Management >FX Interest Rate Swap
FX Interest Rate Swap
 

I. Introduction
A financial agreement between customer and ICBC when one stream of future interest payments is exchanged for another based on a specific principal amount (in foreign currency) with interest calculated on the rate agreed. No principal is exchanged between the parties, principal is only used as the basis for interest calculation. Interest rate swaps often exchange a fixed payment for a floating payment.

II. Target Client
Corporate clients that desire to hedge against currency fluctuation to preserve the value, especially those who have floating rate FX loans of mid-to-long term.

III. Functions and Features
1. FX interest rate swap is the most basic interest rate derivative with simple and flexible structure, easy to swap. According to the need of customers, ICBC can design proposal where the principal is amortized. No fee in early period.

2. Hedge against market risk in a certain extent due to interest rate volatility, lock down the financial cost of a company. Choose the best interest payment structure based on the market prices of interest rate swaps of different terms to reduce 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 in the design of the product, with customized design to meet the special needs of customers to lower or lock down financing cost.

3. Ongoing dynamic management: ICBC provides periodic valuation reports on the unilaterally-terminated forward FX transactions and dynamic management services.

V. Price
ICBC prices quoted to customers are based on the latest trend in FX interest rate swap market, 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. Supply guarantee: Customer must provide margin or other guarantees to cover the obligation, or use the credit line specially granted for trading derivatives.

4. 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.

VIII. Considerations
A minimum of USD 2 million (or equivalent in other foreign currencies) is required, shortest period is 6 months.

IX. Risk Warning
Risks can be negative cash flow on a future trade date if there is a change in market interest rate, gain or loss depending on market value assessment, extra fee for margin calls or reverse close-out due to difference in market value assessment. 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
In August 2011, a customer had a USD loan of floating rate, 3-year tenure. Interest was three months LIBOR + 250 BP (assume prevailing 3-month LIBOR was 0.3142% at the time, initial loan interest rate was 2.8142%, initial rate = fixed rate), interest payment in every three months. The customer was worrying about the rising USD 3-month LIBOR rate. To avert this risk, customer and ICBC entered the USD interest rate swap transaction. ICBC paid customer 3-month LIBOR + 250 BP floating interest to hedge against the USD floating rate of the customer's loan. Customer paid USD fixed-rate interests to ICBC until expiry date of loan.

The interest rate of USD loan will be over 2.8142% if the 3-month LIBOR rate went up. In this case customer saved the spread cost due to higher interest rate. On the contrary, if the 3-month LIBOR rate went down, interest rate of USD loan will be under 2.8142% which meant customer had to pay the fixed rate, no savings in interest cost. But since customer entered the USD interest rate swap to lock down the risk due to interest rate change in the future, stable cash flow can be maintained for future interest payments, no impact in financial cost management.

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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