July 2014

Interest Rate Hedging Products – “Caps, collars and swaps”

These products (often referred to as IRHP’s) are usually offered when credit is given or loans taken out and are intended to “protect” the borrower against some unforeseen movement in the interest rate.  The borrower could be a company or other business, big or small or an individual.

In brief the intended effect of these is as follows:

SWAPS are meant to have the effect of fixing the interest rate;

CAPS are meant to stop the interest rate going above an agreed level but allow it to fall if the base rate falls; and

COLLARS are meant to do the same as CAPS but only allow the interest rate to fall to an agreed lower level.

I say “meant to…” because they are often more complex products than the borrower ever realised and for this reason many may have been missold.

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