HALISTER1: Recommend EUR Cap, Forward Swaps to Hedge Rates: Commerzbank

Recommend EUR Cap, Forward Swaps to Hedge Rates: Commerzbank

(Bloomberg) -- EUR cap and forward-starting swap combination is a reasonable compromise to reap the lion’s share of benefits from low Euribor rates while implementing a hedge against an adverse outcome, Commerzbank strategist Markus Koch writes in client note.
  • Recommend EUR 2y cap struck at 0% coupled with a 2y3y forward start swap
  • Based on current pricing, the 2y cap premium adds only about 4bp to the 2y3y IRS given the ECB’s low rate pledge
    • Note that from a regulatory perspective, borrowers may be obliged to add caps to any forward-swap arrangement to limit overall reset exposure of the loan
  • Euribor-based loans via swaps (ie paying fix vs receiving a variable rate) is fairly straightforward yet; negative carry is considerable as a result of the recent re-steepening of the EUR term structure (3-month vs fixed-rate rate)
  • Borrowers may hence be shunning IRS hedging, even though higher fixed rates are looming for next year
Alert: HALISTER1
Source: BFW (Bloomberg First Word)

People
Markus Koch (Commerzbank AG)

To de-activate this alert, click here

UUID: 7947283