An Interest Rate Swap (IRS) is an interest rate risk management tool that provides the borrower with protection against adverse rate movements by committing to swap a variable rate for a fixed rate of interest.
It allows you to fix the interest costs on variable borrowings, thereby providing you with cashflow certainty. An IRS is used for the purpose of protection against adverse interest rate movements, but there is no opportunity to benefit from a fall in interest rates should that occur during the term of the Swap.
An IRS allows you to tailor your risk management policy in relation to interest rate movements without affecting the underlying borrowing, and there are no upfront fees or payments.
It is important to be aware that an IRS only affects the base interest rate applicable to your underlying lending facility (it is typically measured against EURIBOR or LIBOR). It has no effect on any acceptance or other fees and margins payable under that facility, and you remain obligated to pay those fees and margins regardless of any Interest Rate Swap arrangements.
If you decide to terminate the IRS prior to the maturity date, this early termination may incur a break cost which is calculated at the prevailing market interest rates at the time of the break. As these costs may be significant to you, you should consider this point carefully.
This information is intended as an introduction to this product and doesn’t fully explain the benefits and potential risks associated with this and derivative products in general. Your AIB Customer Treasury Services relationship manager will be happy to meet with you and discuss your requirements, and to explain the benefits and potential risks associated with each interest rate hedging product. You should seek your own independent advice on the legal and financial aspects prior to entering into any derivative transaction.
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We offer a range of products to manage Interest Rate risk, including the “Vanilla” ones outlined here to the more structured products which can be tailored to address your specific requirements. Please contact us and we will be happy to discuss all of these with you.