Greenclose v National Westminster Bank plc: Difference between revisions

Greenclose v National Westminster Bank plc (view source)

Revision as of 10:00, 15 August 2016

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→‎The Loan and the interest rate hedge

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 Now the bank’s theory here is interesting: “We will lend to you at a floating rate for ten years,” it said. “But, if interest rates rise, you may default on your loan. In that case, ''we'' lose. So therefore ''you'' must hedge ''your'' interest rate risk.” You might think NatWest could better manage its own interest rate risk and lend at a ''fixed'' rate. But it’s so easy to be wise in hindsight.
-So to cut a long story short, NatWest made Greenclose by an option to reduce the bank's own risk to Greenclose’s insolvency. Of course, capping exposure to rates that you expect to rise is an expensive business, so to reduce the cost, NatWest suggested Greenclose also limit its ''downside'' interest rate risk also, making the optiont a collar.  (You might think the bank could just as easily have lent at a fixed int ... Oh. I've already made this point, haven't I?)
+So to cut a long story short, NatWest made Greenclose buy an option to reduce the bank's own risk to Greenclose’s insolvency. Because capping exposure to rates that you expect to rise is expensive, NatWest suggested Greenclose also limit its ''downside'' “interest rate risk” also, making the option a “collar”.  (You might think the bank could just as easily have lent at a fixed int ... Oh. I've already made this point, haven't I?)
 Greenclose therefore entered an extendable collar transaction under a 1992 {{isdama}} - the edition is important - which would expire on 30 December 2012 unless NatWest gave proper notice of its extension before that time.