Derivatives

Hedging Currency and Interest Rate Risks

The Bank provides the services of hedging currency and interest rate risk of its clients within the framework of the investment projects and export operations financed by the Bank.

Services of hedging currency and interest rate risks

The Bank’s clients can receive services of hedging currency and interest rate risks within the framework of investment projects and export transactions financed by the Bank. Hedging transactions make it possible to better plan current and future currency risks and decrease interest rate costs.

The Bank has a solid experience in arranging hedging transactions, including swap transactions and currency options.

1. Currency SWAP – a contract that commits two parties to exchange, over an agreed period, streams of interest payments denominated in different currencies and, at the end of the period, the principal amounts. The exchange rate at the origination date of the currency swap is fixed.

2. Interest rate SWAP – an agreement in which the two counterparties agree to exchange interest rate flows. Typically, one party agrees to pay a fixed rate on a specified series of payment dates and the other party pays a floating rate indexed to a reference rate (e.g. LIBOR).

3. Currency option – a contract that confers the right (but not the obligation) to buy or sell a given amount of a particular currency at a specific exchange rate either on a fixed future date (option expiration date)

Example of Currency SWAP Transaction

1. A company has US dollars, but is in need of Tenge to cover its operational costs.

2. Additionally, the company wishes to purchase equipment in US dollars (Euro), or has an outstanding loan in another currency with the approaching repayment date.

3. But at the same time, the company is concerned about a possible depreciation of Tenge with respect to US Dollar or Euro.

4. By way of arranging the currency swap transaction the company can get the required amount of Tenge while having ensured itself from the exchange rate risk through fixing the exchange rate for buying USD (Euro).

Example of Interest Rate Swap Transaction

1. The company has a loan with the floating interest rate payments;
2. Expecting an increase in interest rates, the company wishes to replace it with a fixed-rate loan;
3. By the way of arranging the interest rate swap transaction the company gets an opportunity to replace the loan or a part of it with the loan with fixed interest rate payments.

Example of the Use of Currency Options

1. A company participating in international trade (export-import transactions), is concerned about falling or increasing of the exchange rate of Tenge with respect to US Dollars. Thus, there is a need to insured itself against the exchange rate volatility.

2. The company pays a premium for the option with the amount of premium dependent on the volatility of the Tenge-dollar exchange rate. The option seller is obliged to buy or sell foreign currency at the agreed upon exchange rate.

Treasury Department
Dauren Ibraimov +7(7172)792649 daureni@kdb.kz