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FX Interest Rate Swap Option

I. Introduction
The customer (buyer) pays a certain fee (option fee) and gains the right but not the obligation to enter into an interest rate swap with ICBC at an agreed price on a set date in the future. The agreement will specify whether the buyer pays fixed rate or floating rate.

II. Target Client
Domestic and overseas 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
FX interest rate swap option is a common derivative, flexible structure and easy to swap, no other fees except the upfront option fee. The loss is only limited to option fee. FX interest rate swap option is primarily used by companies to manage interest rate risk, hedge against market risk due to interest rate volatility, and lock down financial cost.

IV. Advantages
1. Competitive product pricing: In terms of exchange rate quotes, ICBC has a team of experienced 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 customer and help customer lock down interest rate cost.

3. Ongoing dynamic management: ICBC provides regular valuation report on the transaction, 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
When market interest rate is higher than strike price, you may lose the upfront option fee if you do not exercise the right. 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, loan repayment starting one year later, interest payment in every three months. The customer is worrying about the rising USD 3-month LIBOR rate after 1 year. To avert this risk and make use of the prevailing low market rate, customer and ICBC enter an USD interest rate swap option contract. The fixed rate is 3%. Customer pays an upfront option fee to ICBC.

ICBC agrees, customer pays fixed rate (3%) after 1 year, ICBC receives floating LIBOR rate. If the LIBOR rate after 1 year does not goes up as expected, customer has the right not to proceed with the swap.

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.

Global Market