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Interest rate floor

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It is an agreement under which the bank pays compensation to you in case that the variable interest rate (e.g. Euribor 3M, Euribor 6M) falls below the strike level during an agreed period of time. You are required to pay to the bank a one-off premium, which is usually paid on the transaction date.

Agree on the acceptable terms

  • Effective way to set the lowest variable interest rate for the entire period
  • Taking advantage of favourable circumstances as interest rates increase
  • Minimum transaction amount EUR 1 million

Risks

After an agreement has been acquired, the paid premium is not refunded (if was paid).
For instance, if market interest rates will be below minimum variable rate for longer period, in case of an interest rate collar buyer would incur a loss. 

These transactions are concluded over-the-counter; therefore, under certain circumstances in the market, the market value of fixed-term or interest rate collars may be subject to higher volatility. For this reason, where the concluded interest rate collar is sold on the market, or where an offsetting transaction is used for closure, the market value of the transaction may be unfavourable to the party to the transaction.

Example

Let us suppose that you concluded an interest rate swap on 1 January 2021

Basic terms  
Transaction amount EUR 1 million
Expiration time  5 years
Ceiling limit set by you 0.5%
Variable interest rate EURIBOR 6M
Premium due to the bank from you EUR 16,000
On 1 July 2021, EURIBOR 6M stands at 0.60 %. No amount is due to you from the bank as the variable interest rate has not reached the set 0.5% limit
On 1 January 2022, EURIBOR 6M falls to 0.30 %.
The bank pays compensation to you for increased interest expenses: 1,000,000 x (0.50 — 0.30) % x 180 / 360 = EUR 1,000
The same principle applies to the calculation of other payments until the completion of the transaction, i.e. until 1 January 2026

Contact us for more information


Business customer support (I–V 8.00–17.00): +370 5 268 2822
Markets Sales (I–IV 8.00–17.00; V 8.00–16.00): +370 5 268 2838

Email us: fx@seb.lt

Markets in Financial Instruments Directive

The Markets in Financial Instruments Directive (MIFID) regulates the rendering of financial investment services and has been effective in the European Union and the European Economic Community (EEC) since 2007. The requirements of MiFID are aimed to provide additional protection to investors and promote the transparency of financial markets in terms of transactions in financial instruments.

After 3rd January 2018, new rules of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II) came into force and affect each investor who engages in transactions in financial instruments.

 

Please note that the data, examples, and information on derivative financial instruments provided herein is for informational purposes only. This information has been prepared without consideration or regard of your knowledge or experience related to specific financial instruments and without having any information about your investment objectives or financial capacity to assume risks related to the conclusion of the transaction that meets your investment objectives; therefore, it cannot be construed as a personal investment recommendation, advice on trading in derivative financial instruments or investment research, order or invitation to buy or sell specific financial instruments and may not constitute any basis or part of any subsequent transaction. Further information on risk factors is available in the publications “Description of Risks Related to Financial Instruments” (in Lithuanian) and “Derivatives instruments description”.