ICICI Bank had executed India’s 1st set of ‘swaption’ deals with HSBC and Standard Chartered Bank.
- ICICI Bank and the two overseas lenders transacted ‘swaptions’ on Overnight Index Swap (OIS) for a total notional sum of Rs 700 crore.
- The Reserve Bank of India issued guidelines for ‘swaption’ deals in June 2019.
Key Points:
i.Interest Rate Swap (IRS): it is a derivative contract that involves the exchange of a stream of agreed interest payments on a ‘notional principal’ amount during a specified period.
ii.Interest Rate Swaption: It is an option on IRS. A swaption contract gives the buyer the right, but not the obligation (not bound), to enter into an IRS deal.
- Swaption will protect the borrowers and investors from changing interest rate scenarios by enabling them to fix an interest rate on future borrowings through the option on an IRS.
Benefits under Swaption Contract:
i.If a borrower raises local bonds with a ‘put option’, the investors might surrender those papers in a rising rate scenario. It will force a borrower to issue new bonds at higher rates.
- But, if the borrower buys a swaption contract, it will protect the borrower against any losses from rate movements (in the case of the investors exercising their put options).
ii.Similarly, if a borrower raises bonds with ‘call options’ and exercises them in a falling interest market, the investor will be made to invest at lower rates. Whereas if they buy a swaption contract, it will protect investors from any rate losses.
Note – A ‘call option’ gives the holder the right to buy a stock and a ‘put option’ gives the right to sell a stock i.e. (buy – call option, sell – put option).
ICICI Bank and State Bank of India were the only 2 banks in India that are traded in the global Credit Default Swap (CDS) market.
- CDS was the 1st IRS that occurred between IBM and the World Bank in 1981.
Recent Related News:
The Securities and Exchange Board of India (SEBI) has issued guidelines for the participation of Mutual Fund (MF) schemes in Interest Rate Swaps (IRS).
About ICICI Bank:
Establishment – 1955 (Incorporated in 1994)
Headquarters – Mumbai, Maharashtra
MD & CEO – Sandeep Bakhshi
Tagline – Hum hai na, Khayal Apka
About HSBC:
Establishment – 1865
Headquarters – London, United Kingdom
Group Chairman – Mark E Tucker
