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Greenclose v National Westminster Bank plc: Difference between revisions
Greenclose v National Westminster Bank plc (view source)
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The point was to guard against rising interest rates. Being an uncommonly low 4.5% in 2006, rates were generally expected to rise. Oh, how we weep with hindsight. | The point was to guard against rising interest rates. Being an uncommonly low 4.5% in 2006, rates were generally expected to rise. Oh, how we weep with hindsight. | ||
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. If | 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. If that happens, ''we'' lose. Therefore ''you'' must hedge ''your'' interest rate risk.” | ||
You might think NatWest could better manage its own interest rate risk — being a bank, and everything — and lend to poor little Greenclose a ''fixed'' rate. But it’s so easy to be wise in the rear-view mirror. | You might think NatWest could better manage its ''own'' [[interest rate]] risk — being a [[bank]], and everything — and lend to poor little Greenclose a ''fixed'' rate. But it’s so easy to be wise in the rear-view mirror. | ||
So NatWest made Greenclose to buy an option to reduce the bank’s own risk to Greenclose. Because such an option is expensive, NatWest helpfully suggested Greenclose ''sell'' the bank an option on the ''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]]?) | So NatWest made Greenclose to buy an option to reduce the bank’s own risk to Greenclose. Because such an option is expensive, NatWest helpfully suggested Greenclose ''sell'' the bank an option on the ''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]]?) | ||