Geistesblitz 07/19

Initial situation

• 3-month USD Libor: 2.3025% p.a.
  
• 5-year CMS rate: 1.8160% p.a.
  
• Alternative 5-year Swap: 1.9000% p.a.
  
• Interest difference (5 years – 3 months): 0.4025% p.a.
  
• Alternative 4-year Forward Swap (starting in 1 year): 1.8300% p.a.
  

USD interest optimization with “Cancellable Double-Swap”

• Maturity: 5 years from spot
  
• Payments: quarterly, act/360
  
• Client receives: 3-month USD Libor
  
• Client pays: 1.59% p.a.
  

• Your client reduces his interest rate for one year considerably. The subsidized fixed rate undercuts the current level of the reference interest rate as well as the swap rate of a 5-year hedge strategy. Compared to the current 3-month USD Libor, the interest rate is approx. 0.71% p.a. lower. Relative to the alternative 5-year swap rate of 1.90% p.a., the interest rate drops by 0.31% p.a.
• If the swap continues beyond the first year, your client is hedged at a fixed rate that is 0.24% p.a. lower compared to today’s alternative 4-year forward swap of 1.83% p.a.

Risk:

• During the first year, your client can no longer participate in falling USD interest rates. This is the case for further 4 years, if the bank does not terminate the interest rate strategy.
• The right to cancel the swap after the first year lies exclusively with the bank. If the swap is terminated, the client is once again exposed to an interest rate risk. Otherwise, the notional amount of the swap is doubled.

In a nutshell

The new Geistesblitz “Cancellable Double-Swap” gives your client the opportunity to fix his currently variable interest rate for one year at a level well below the variable reference rate as well as the 5-year swap rate. After the first year, the strategy will either be terminated by the bank or continued at this level – well below the current forward swap rate – with double the notional amount. As a result, the client optimises his interest rate for at least one year. Afterwards, he continues to be hedged at these conditions or the strategy is terminated and your client has to decide between hedging at future market levels or remaining financed on a variable basis.