- Forward Rate Agreement (FRA) – is a forward contract in which one party pays a fixed interest rate and receives a floating interest rate equal to a reference rate (the underlying rate). The payments are calculated over a notional amount over a certain period, and netted; i.e. only the differential is paid. For example, if a client wants to lock in a fixed rate at which they will borrow in three months' time, they can enter into a three month FRA to pay 3.50%. In three months' time if rates are higher than 3.50%, ADCB pays the client the current value of the difference. If rates are lower than 3.50%, the client pays ADCB the present value of the difference.
- Options – cap and floor
The cap is a product that enables clients to cap their interest rate payments.
If rates rise above the cap strike, the client receives the difference between
the interest rate fixing and the strike. The client pays a premium for the cap.
The floor is a product that enables clients to floor their interest rate
receivables. ADCB pays the client the difference between the interest
rate fixing and the floor strike if rates fix below the strike. The client
pays a premium for the floor.
- Vanilla Interest Rate Swap (IRS) – the vanilla IRS is a derivative product that is used to hedge against rising rates. The mechanics of the product are such that the client pays a fixed rate to receive floating. Irrespective of the market rate, the client will continue to pay a fixed rate for the entire life of the trade.
- Knock Out Swap (KO Swap) – this is an interest rate swap that knocks out periodically if rates fix above a predefined barrier. The client is hedged against higher rates as they pay a fixed rate to receive floating. As the swap has the KO feature, the client pays a fixed rate that is lower than the vanilla IRS swap.
- Callable Swap – this is an interest rate swap that can be called by ADCB at certain predefined dates during the life of the trade. The client is hedged against higher rates as they pay a fixed rate to receive floating. The client pays a lower fixed rate than the vanilla IRS because they have given ADCB a right to call the swap.
- Extendable Swap – this is a variation to the vanilla interest rate swap that gives the client the right to extend the swap at the maturity of the trade. The client can extend the swap to pay the same fixed rate under the original swap. As the client has the right to extend the swap the fixed rate that they pay is slightly higher than the vanilla swap rate.
- Switchable Swap – this is an interest rate swap that enables the client to hedge by paying a rate that is lower than the vanilla swap because, the client gives ADCB the right to switch their payments from fixed to floating or floating to fixed at some point during the life of the trade.