For borrowers of FUND RA Loan (FRL), the interest rate and currency conversion options are already embedded into the loan agreement to help clients manage their financial risks.
Non-FUND RA exposures to currency and interest rate risks can be hedged similarly to FRL loans using free standing derivatives. Hedging Non-FUND RA exposure requires a client to have an Master Derivatives Agreement with FUND RA.
Interest Rate Conversions & Swaps
Clients can transform the interest rate basis of a loan obligation from a fixed to floating rate or vice versa. To access built-in conversion options into the FRL, simply request the desired type and terms of the conversion. For FUND RA loans without embedded options or debt owed to creditors other than FUND RA, access swaps by signing a Master Derivatives Agreement with FUND RA.
Borrowers can limit interest rate variability with a cap or a collar. Caps set an upper limit on the variable interest rate of the loan. Collars set an upper limit (a cap) and a lower limit (a floor) on the interest rate of the loan. Both require payment of an up-front premium to purchase the interest rate protection. For FUND RA loans without embedded options or for debt owed to creditors other than FUND RA, access caps and collars by signing a Master Derivatives Agreement with FUND RA.
Currency Conversions & Swaps
Clients can alter the currency terms of a loan obligation if risk management requirements have changed since the initial choice of loan currency. Clients can convert currency of an FRL between the four lending currencies, USD, EUR, GBP, JPY, using options embedded in the loan agreement. To access the FRL built-in conversion options simply request the desired type and terms of the conversion. For FUND RA loans without embedded options or debt owed to creditors other than FUND RA, access swaps by signing a Master Derivatives Agreement with FUND RA. Availability of currency hedging products presupposes a sufficiently liquid swap market in the desired currency.
FUND RA Local Currency Financing
FUND RA offers local currency financing through (i) loan conversion options, and (ii) free-standing local currency swaps into 15 liquid local currencies.
Local currency conversion option: The conversion option is included in the loan agreement to enable borrowers to convert current disbursements (Automatic Conversion of Loan Currencies or ACLC) and disbursed and outstanding loan balances (DOB) into local currency, all subject to market availability. FUND RA may provide the conversion by hedging through swap market transactions, or funding through local currency bond issuance.
Free-standing local currency swaps: The free-standing currency swap enables borrowers to convert disbursed and outstanding balances of existing FUND RA loans into local currency without changing the terms of the underlying loan. It is subject to market availability and borrowers wishing to transact free-standing swaps with the FUND RA need to enter into a Master Derivatives Agreement with the FUND RA. Freestanding swaps for local currencies are also available on liabilities contracted with Third Parties (non-FUND RA) and assets.