Currency and interest rate forward transactions

VTB Bank offers clients the following instruments to hedge against currency and interest rate risks:

  • Currency forward contracts,
  • Interest rate forward contracts,
  • Currency, interest rate and currency/rate swaps,
  • Interest rate options.

The bank can perform additional currency and interest rate transactions at the client’s request.

Transactions are performed on the basis of a contract with the client using Reuters Dealing, BS Client, fax, telex, or other electronic means. Each client is assigned a cash limit.

Brief overview

Currency forwards involve buying/selling foreign currency for roubles or another foreign currency which is held for at least three business days and is settled at the exchange rate locked in when the contract was signed.

Currency swaps combine back-to-back currency conversion transactions for the same amount of base currency, but with different settlement dates. The exchange rates for each side of the swap transaction are locked when the contract is signed.

Interest rate forwards are agreements in which one party agrees to pay the other, on a set date, the difference between the amount of interest accrued on a certain nominal obligation at a fixed rate and the amount of interest accrued on the same amount of nominal obligation at a floating (reference) rate which is determined by the parties on a set date.

Forward rate agreements are a variety of interest rate forwards in which one party agrees to take a notional loan (no money changes hands) from the other party at a certain interest rate for a set period.

Interest rate swaps are agreements between two parties to exchange interest rate payments for a set notional amount. Typically, this transaction involves swapping an interest payment on a fixed-rate instrument, such as a coupon bond, for an interest payment based on a floating rate.

Currency and interest rate swaps are agreements between two parties under which they pay each other interest rates on obligations in different currencies at set dates during the agreement term. This type of transaction typically involves an exchange of principals. The notional principal is exchanged to open the transaction, usually at the prevailing spot rate. Interest payments are made at a fixed, floating or zero coupon rate. Upon expiration of the swap contract, the principal is exchanged back at the original spot rate.

Currency options are a derivative instrument that allows a client to buy (from the bank) the right to buy/sell a fixed amount of currency at a fixed exchange rate on a future date (European options). The client is under no obligation to exercise the option, i.e. if the market situation changes, the client may prefer to buy/sell the currency at the current rate instead of exercising the option in order to close the trade. Option buyers pay the bank a non-refundable premium.

Interest rate options are a derivative instrument that allows a client to buy (from the bank) the right to pay or be paid a set rate at a future date. It works the same way as the currency option regarding the premium and how it is exercised.