Product Description

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• Interest Rate Hedging

  • 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.

• Foreign Exchange Hedging

  • FX forward – is an agreement between two parties to buy or sell a currency at a pre-agreed future point in time. One party agrees (obligated) to sell, the other to buy, for a forward price agreed in advance.
  • Cross currency swap – the cross currency swap enables clients to swap strips of cashflows from one currency into another at future dates. Both legs of the swap could be fixed/floating, floating/floating or fixed/fixed.  The rate of exchange is fixed in advance. The swap usually has an initial and final exchange but this is not always the case.
  • Options – call and put

            An option is a financial instrument (or derivative) which gives the buyer
            (or holder) the right, but not the obligation, to buy or sell an underlying
            asset for a fixed price (known as the strike price) at a specific time
            (known as expiry). For this right, the option buyer pays a premium to
            the seller. The option seller has a duty to buy or sell the underlying
            asset if the buyer decides to exercise his right. 

  • A call – enables the client to lock in the rate at which they buy a currency at a future date. 
  • A put – enables the client to lock in the rate at which they sell a currency at a future date 

• Commodities Hedging

  • Commodity forward - the commodity forward enables clients to buy or sell a commodity at a fixed price at a later date in the future. For example, the buyer of aluminum could agree to buy 50,000mt at a fix price of $3000/mt in three months' time.  The client locks in a fixed price of aluminum for their transaction in three months.

  • Commodity swaps - a commodity swap allows a client to buy or sell a strip of commodity at different times in the future.
    
    For example a five year commodity swap that sells 50,000mt with monthly settlements at $3,000/mt allows a client to buy or sell a fixed amount of commodities every month. Each month the buyer will pay $3,000/mt to receive the spot price of aluminum.  If the spot price is higher, the client receives a net payment. If the spot price is lower, the client makes a net payment to ADCB.

  • Options – call and put

            An option is a financial instrument (or derivative) which gives the buyer
            (or holder) the right, but not the obligation, to buy or sell an underlying
            asset for a fixed price (known as the strike price) at a specific time
            (known as expiry). For this right, the option buyer pays a premium to
            the seller. The option seller has a duty to buy or sell the underlying
            asset if the buyer decides to exercise his right.

  • A Call – enables the client to lock in the rate at which they buy a commodity at a future date 
  • A Put – enables the client to lock in the rate at which they sell the commodity in future

• Credit Hedging

  • Credit default swap - this is a financial derivative product that enables counterparties to transfer credit risk. The buyer of protection pays a premium to the seller of protection to get credit protection on a fixed notional amount if a specific entity defaults (Reference Entity).
  • Total return swaps - this is financial derivative in which a client swaps the return on an underlying asset for a fixed or floating payment. For example, if a client wants to borrow money to buy a bond because they want the return on the bond but the client has a higher cost of borrowing than ADCB, then ADCB can borrow money (at a lower cost than the client) to buy the bond and pay the client the total return on the bond. In exchange, the client will pay ADCB the cost of borrowing plus a fee.

• Equity Hedging

  • Options – call and put

            An option is a financial instrument (or derivative) which gives the buyer
            (or holder) the right, but not the obligation, to buy or sell an underlying
            asset for a fixed price (known as the strike price) at a specific time
            (known as expiry). For this right, the option buyer pays a premium to
            the seller. The option seller has a duty to buy or sell the underlying
            asset if the buyer decides to exercise his right.

  • A Call – enables the client to lock in the rate at which they buy a comodity at a future date. 
  • A Put – enables the client to lock in the rate at which they sell an comodity in future.

  • Total Return Swaps (TRS) - this is financial derivative in which a client swaps the return on an underlying asset for a fixed or floating payment. For example, if a client wants to borrow money to buy an equity because they want the return on the equity, but the client has a higher cost of borrowing than ADCB, then ADCB can borrow money (at a lower cost than the client), buy the equity and pay the client the total return on the equity. In exchange the client will pay ADCB the cost of borrowing plus a fee.
  • Equity swaps - the equity swap is similar to the TRS. In the equity swap ADCB and the client hold a particular equity and both ADCB and the client agree to swap the return on their equity.