A spot transaction is the direct exchange of one currency for another. The spot rate is the current market price. A spot transaction does not require immediate payment but is usually settled two working days after the trade date.

Exceptions to the “value date” (the second working day after the transaction):

• USD/CAD spot transactions (usually one working day after the transaction as Canada is located in the same zone as the United States and an earlier value date is feasible).
• All spot transactions whose value dates fall on an official bank holiday in the United States are settled on the next working day. Spot transactions whose value dates fall on an official bank holiday in one of the two currencies traded are settled on the next working day.
• Spot transactions with banks in the Middle East have a split settlement date one or two days before Friday (banks in this region are closed on Friday and open on Saturday).

A forward exchange transaction is a binding contract to buy or sell one currency against another. The contract is settled on each possible pre-agreed date three or more days after the transaction. The forward exchange rate at which the forward transaction is settled is stipulated at the beginning.

The forward exchange rate for all currencies draws a conclusion starting from the spot rate and the interest differential of the two currencies. Although spot rates are quoted in the exchange rates, forward rates are quoted in premiums and discounts. The premium or discount is measured in points, which represents the difference in the interest rate between the two currencies.

Cylinder option

The cylinder option is a combination of two plain vanilla options. The purchased option gives the investor the right to hedge its exposure, the sold option obliges it to cash in on profits.

The advantage of this structure lies in the fact that the premium expense can be significantly reduced or set at zero.

Forward extra contract

The forward extra contract is an attractive alternative to a forward exchange transaction. The hedging rate is close to the forward exchange rate, in return the purchaser of this structure has the potential to make a profit up to a pre-defined exchange rate (trigger). If this trigger is reached, the investor will convert at the hedging rate at the end of the term.

Opportunity

• Calculation basis as the hedging rate is known
• Potential to make a profit up to the trigger

Risk

• If the trigger is reached in volatile markets, the forward extra contract is settled at the hedging rate - which will deviate slightly from the forward exchange rate.

Participating forward

The participating forward is a combination of a forward exchange transaction and one (or more) option transaction(s). Here, the premium is included in the calculation of the forward exchange rate.

While being completely hedged, investors have the opportunity of being able to benefit at least partially if exchange rates move in their direction.

In an FX swap, one currency is exchanged against another for a specific period at a specific exchange rate and exchanged back at a subsequent date at an agreed exchange rate. The FX swap is a spot transaction and a forward transaction, running in opposite directions, or two forward foreign exchange transactions with different settlement dates, also running in opposite directions. 

The costs of an FX swap are established through the interest differential of the two currencies and quoted in swap points. The use of FX swaps is similar to the borrowing and lending of currencies on a secured basis. Generally, they are used by market players for liquidity management, for hedging and entering into interest rate positions, etc.

Unlike forwards, futures are standardised and extremely fungible. To avoid losses as a result of one counterparty becoming insolvent and to make the conclusion of a futures contract easier, the contract is processed via a clearing house. The counterparties have to provide the clearing house with collateral in this connection. This procedure is also referred to as marking-to-market or daily adjustment to reflect profits and losses, it ensures that the contract is fulfilled.

A forward rate agreement is an OTC forward rate agreement between two parties on an interest rate, which is binding for an agreed period in the future (terms of up to two years).

The following apply with regard to the factors affecting the value of a cap:

• The longer the term, the higher the cost of the cap.
• The lower the strike, the higher the cost of the cap.

An interest rate floor is the opposite to an interest rate cap. A floor is a contractual agreement between two parties about a fixed minimum interest rate with regard to an underlying nominal capital sum. Should the basic interest rate cross the minimum level (strike price) at predefined times during the term, the seller of the option will pay the purchaser a cash payment equal to the difference between the minimum level and the basic interest rate. If the basic interest rate is higher than the strike price at one of the predefined times, no payment will take place on this date. Consequently, floors provide insurance against falling interest rates but allow investors to benefit from increases in the interest rate.

An interest rate swap is an agreement between two parties (A and B) regarding the exchange of different, specified interest payments in a currency during a period fixed in the agreement. The level of interest paid is derived from the underlying interest rate and capital sum (“notional amount”) for the relevant interest rate period. The notional amount is not changed during the interest rate swap.

Constant maturity swap

The constant maturity swap (CMS) is a special form of interest rate swap in which at least one swap partner pays a variable payment flow, which is regularly adjusted to a longer-term reference interest rate (e.g. three-year swap rate).

If a borrower expects a flattening in the yield curve, which is not anticipated by the market, it can enter into a pay CMS – receive EURIBOR interest rate swap, in which the underlying term of the CMS rate can be selected in line with the borrower’s precise expectations.

Quanto swap

The quanto swap is a special form of interest rate swap. By using a swap of this kind, the interest differential between two different currencies can be exploited without incurring any currency risk.

The quanto swap is an option of potentially reducing the interest charges on a loan – by exploiting foreign interest rates – without incurring any currency risk. The risk lies solely in the fact that the interest payments to be made on the basis of a foreign interest rate could turn out to be higher than EURIBOR interest payments.

Range accruals

With this form of investment, the amount of interest paid is dependent on the number of days on which a specific market condition is met.

A daily range accrual pays a fixed coupon on the days on which a specific index (e.g. three-month EURIBOR) is within a preset range. The customer will not receive any interest on days when this condition is not met.
Usually, range accruals are also callable, i.e. the issuer has a right to cancel them.

Deposit ranger

The FX deposit ranger offers an attractive alternative to a traditional investment transaction.
Features:

• Capital and currency guarantee
• Guaranteed minimum interest rat

To achieve the highest rate of interest on your investment, the actual spot rate on the date of the transaction has to remain within the agreed rate range until two working days before the investment matures.

Your investment will be settled at the minimum interest rate, if the current spot rate moves outside the agreed rate range during the term.

Turbo deposit

The FX turbo deposit offers an attractive alternative to a traditional investment transaction.

Features:

• Capital and currency guarantee
• Guaranteed minimum interest rate

If the agreed spot rate is above (in the case of a euro call) or below (in the case of a euro put) the agreed rate two days before the term ends the investment will benefit from the favourable change in spot rates.
Your investment will be settled at the minimum interest rate, if the current spot rate remains below (in the case of a euro call) or above (in the case of a euro put) the agreed rate two days before the term ends.

Dual redemption deposit

The FX dual redemption deposit offers an attractive alternative to a traditional investment transaction.

Features:

• No (!) capital or currency guarantee
• A far higher interest rate than a comparable money market investment

If the agreed spot rate is below (in the case of a euro call) or above (in the case of a euro put) the agreed rate two days before the term ends you will have your capital including interest in the currency in which you made your investment returned to you.

If the agreed spot rate is above (in the case of a euro call) or below (in the case of a euro put) the agreed rate two days before the term ends you will exchange your capital including interest into the counter currency at the agreed rate and will have this returned to you.

FX-linked cap

This product constitutes an interest rate hedge using a cap.
The cap premium is equalised by the premium on a sold foreign exchange option. If the foreign exchange option is exercised at the end of the term you will be obliged to exchange the currency of your loan.

The product is mainly suitable for balloon payment loans.

FX-linked interest rate swap

In principle, this product constitutes an exchange of interest payment flows (fixed/variable).

In each case, the variable interest is paid to cover the interest payable on the loan. The fixed interest payable is well below the current level.
The costs of this interest differential are by met by the premium on a sold foreign exchange option. If the foreign exchange option is exercised at the end of the term you will be obliged to exchange the currency of your loan.

In each case, the interest rate hedge is free of any premium for the entire term.
The product is mainly suitable for balloon payment loans.

Range cap

This product constitutes an interest rate hedge using a cap.

If the pre-determined currency pair remains within a specific rate range during the first year of the term the cap will be free of any premium for the entire term.  If the currency pair moves outside this rate range during the first year of the term the increased cap premium will be due.

In each case, the interest rate hedge will apply for the entire term.
The product is suitable for both balloon payment and amortising loans.

Range interest rate swap

This product constitutes an exchange of interest payment flows (fixed/variable).

In each case, the variable interest is paid to cover the costs of the loan. The fixed interest payable is well below the current level. In each case, the fixed interest is at the agreed low level in the first year.

If the pre-determined currency pair remains within a specific rate range during the first year of the term the fixed interest rate will also remain at the low level for the entire term.  If the currency pair moves outside this rate range during the first year of the term the fixed interest rate level for the remaining term will increase slightly above the current fixed level.

The product is suitable for both balloon payment and amortising loans.

Group Treasury has expanded its product range and is actively involved in commodities trading. In this very wide field of activity, we restrict ourselves to OTC (over the counter) traded commodities. This means that we do not make any exchange-traded commodity products of any kind available. We offer hedging solutions in forward transactions (swaps) and options. All transactions are “cash-settled”, which means that there is no physical delivery of the commodities.

Future developments – trends
In addition to active participation in the energy and base metals markets, Group Treasury will also monitor trends on the plastics market closely. At present, there are no suitable hedging instruments for PET packaging here. As we see great potential in this area, we would like to offer the usual services here as soon as this is possible on the international commodity markets.

We should also like to exploit the commodity markets in the structured OTC segment in future. There are options for the development of structured securities here in particular.

We are, of course, happy to provide you with any price quotations you may require or answer any questions you may have regarding the products.

The Fixed Income & Derivatives department is engaged in trading the following financial products:

• Bonds
• Government bonds
• Volksbank bonds
• Corporate bonds
• IMMO-BANK bonds
• Jumbo mortgage bonds
• Financials
• Austrian domestic bonds
• Credit derivatives
• Eurobonds

Derivatives

• OTCs on euro zone government bonds, Jumbo mortgage bonds and own issues
• Asset swaps

Plain vanilla

Fixed coupon
A fixed coupon bond is a fixed interest bond on which previously determined interest is paid on defined coupon dates.
 
Floating rate note (FRN)
Floating rate notes are bonds on which a variable rate of interest is paid and which are repaid at their nominal value.

Zero

Zero bonds are bonds which do not pay coupons. Instead of periodic interest payments, here the difference between the repayment price and the issue price represents the interest income up to final maturity. Accordingly, investors only receive one payment: the sales proceeds from a premature sale or the redemption proceeds on maturity.
The interest rate, which provides the basis for the IRR (internal rate of return), can be either fixed or floating.

Callable

Callable bonds are also provided with a termination option on the part of the issuer. The issuer is usually entitled to terminate the bond at one (or more) specific termination dates at the nominal value.

Accumulation bonds

In the case of accumulation bonds (also known as range accrual notes), the coupon depends on the trend in a reference interest rate. Here, a proportional fixed interest rate can be paid for those days on which the reference interest rate is within a certain range and a different proportional interest rate can be paid on those days when the reference interest rate is outside the range. Alternatively, the reference interest rate is monitored once during the entire coupon period. If the reference interest rate is above a set limit then fixed interest rate A will be paid, otherwise fixed interest rate B.

CMS floaters

CMS bonds and turbo CMS bonds are bonds, whose interest rate depends on the trend in a CMS (euro mid constant maturity swap rate) for one or more specific terms. Here, the investor profits more if the CMS rises above a specific ceiling.

Fixed reverse floaters

Reverse floating rate notes are bonds where the floating interest rate is deducted from a fixed interest rate, meaning that the lower the floating rate, the higher are the coupon payments received by investor. The notes are redeemed at their nominal value.

FX-linked

A bond whose interest rate and/or redemption price is based on the change in value of a currency pair. Mostly FX options (exotic options) are used as a structure.

Inflation

Inflation linked bonds are floating rate or fixed rate bonds where the interest rate is either multiplied by an inflation index or an inflation index is added to the interest rate. The notes are redeemed at their nominal value.

Echo

With a snowball bond (also referred to as an echo bond) a variable coupon, which depends on the previous coupon, is paid after the fixed coupon period. Here, a pre-defined fixed rate is added to the previous coupon and a reference interest rate (usually six-month EURIBOR) is subtracted.

Ratchet notes

In the case of ratchet notes, a specific reference rate is paid, whereby changes to the previous coupon period can be capped and floored. Usually, the change in the coupon is capped while a floor is not always provided.

Step-up

A bond where the nominal interest rate is not constant during the term of the security but increases in line with a schedule set when it was issued (interest rate ladder).

Interest curve performer

With an interest curve performer (also referred to as a steepener), a coupon is paid that is proportional to the difference between two points on the interest curve. Usually, this coupon equates to a multiple of the difference between a ten-year and a two-year CMS.

Switchable

With a switchable bond, the issuer is entitled to decide, on the coupon payment dates, whether it continues the bond as a coupon bond or a zero bond. If the issuers opt to continue the bond as a coupon bond then the agreed coupon including any coupons that may have previously accrued including compound interest is paid out. If the issuer opts for the zero coupon alternative, it undertakes to pay the coupon including compound interest either at the time at which it switches the bond to a coupon bond or on redemption.

Certificates

Index certificates are investment products listed in units on a specific reference index. The investor participates in the performance of the index, which is stipulated in advance. This product is exempt from EU withholding tax under current legislation.

A large number of different derivative financial instruments, which allow the credit risks of bonds, loans and other credit positions to be traded separately, are combined under the term “credit derivatives”.
Among others these include credit default swaps.

Credit derivatives are used, among other things, to optimise the return on the investment portfolio. In essence, this is attributable to the advantages that credit default swaps demonstrate, most notably in comparison with direct investments:

• Substantial flexibility of credit default swaps (CDS)
  A bond purchaser is limited to the bonds available. A CDS can be individually tailored with regard to term, nominal amount etc. Credit derivatives can also be concluded on referees that have not issued any bonds in the market and cannot therefore be traded in the investment portfolio.
• Substantial efficiency of CDS
  Credit decision-making and funding can be separated, since no capital backing is required.
• A CDS is not exposed to any significant risk of interest rates changing
  Credit risks can be incurred with the CDS without generating major changes in the interest ledger.

Credit default swaps are derivative financial market products which entail neither interest-rate nor currency risks.  Only creditworthiness risks are traded.

A credit default swap (CDS) is a credit derivative and is concluded between two parties. The party granting security (protection seller) protects the secured party (protection purchaser) against the occurrence of a credit event – e.g. default – of a reference value. In return, the party granting security receives fixed payments from the secured party periodically until the end of the term or a credit event occurs.

Motivations for the protection seller:

• Leverage and yield (no financing required)
• Generation of income on unutilised credit lines
• Diversification of the bond/credit portfolio
• Off-balance sheet commitment

Expectations: future reduction in CDS premiums

Motivations for the protection purchaser:

• Hedging credit exposure
• Releasing credit limits without the client being aware of this
• Improving the return on equity

Expectations: future rise in CDS premiums or default

CDS are customised transactions where the term, nominal values, method of payment and credit events are agreed individually.

The ISDA framework agreement, which creates the legal environment in advance and thus facilitates the conclusion of individual transactions, is a fundamental prerequisite. CDS can therefore be agreed with reference to the framework agreement and the “2003 ISDA Credit Derivatives Definitions”. The English original is decisive in interpreting the "2003 ISDA Credit Derivatives Definitions".

Credit events

The "2003 ISDA Credit Derivatives Definitions" distinguish between six different credit events.

• Bankruptcy (insolvency)
• Failure to pay (delay in payment/non-payment or shortfall in payment falling the expiry of a deadline)
• Obligation default (potential prepayment)
• Obligation acceleration (premature maturity)
• Repudiation/moratorium (debt repudiation/deferment of payment obligations)
• Restructuring (debt restructuring)

Agreed credit events according to ISDA 2003 for sovereign reference debtors:

Agreed credit events according to ISDA 2003 for corporates:

Settlement

• Settlement
  Physical delivery is agreed as standard in the case of plain vanilla credit default swaps. The protection seller pays the agreed nominal amount of the transaction to the protection purchaser and, in return, receives a bond or a credit issued by the reference subject in one of the G7 currencies and CHF, worth 100 % of the amount due (= nominal value) from the protection purchaser:
• Cash settlement – floating amount
  In this alternative, the cash settlement to be paid by the seller is only stipulated by the calculation agent when the credit event occurs. The amount of the cash settlement is determined by the loss in value of the reference bond following the occurrence of the credit event: nominal value × (100 % - final price of the reference bond). The final price of the reference bond is determined by the calculation agent in accordance with the market quotations received and the agreed valuation methods. The “2003 ISDA Credit Derivatives Definitions” acknowledge various valuation methods depending on whether there are one or more reference assets and the valuation is carried out on one day or over a period of several days.
• Cash settlement – fixed amount
  In the event of a credit event occurring and other preconditions for settlement applying, the protection seller has to render a cash settlement to the protection purchaser in the amount determined when the transaction was concluded. This settlement alternative applies in the case of fixed recovery (digital) CDS.

Fixed recovery (digital) CDS

In comparison with the plain vanilla credit default swap (CDS), the protection seller receives a higher CDS premium in the case of fixed recovery (digital) CDS if the agreed fixed recovery rate falls short of market expectations.
No capital repayment in the case of an agreed recovery rate R = 0 % (zero recovery CDS) if a credit event occurs.  The possibly higher loss (compared with plain vanilla CDS) resulting from the occurrence of a credit event is offset by the higher CDS premium.

Credit-linked notes (CLNs) combine and securitise default risks with securities. Embedding the credit default swap in a credit-linked note transforms the “CDS” derivative into a "CLN” actual. The CLN investor (party granting security) receives an interest payment which is understood as the premium for assuming the credit risk.

A credit-linked note (CLN) can be described as a “synthetic bond” if it consists of a “normal” bond and a credit default swap (CDS). The CLN investor and its capital answer for the risk of a credit event affecting the underlying reference name via the CDS but receives a higher coupon – compared with a "normal bond”.
There is the option of equipping the CLN with a capital guarantee, i.e. the bond is repaid at a fixed rate (e.g. nominal value) at the end of the term and only the (pro rata) interest payments are lost in the event of one or more credit events occurring.
 
Irrespective of the number of reference debtors, there may be a cash settlement or physical delivery of a security issued by the corresponding reference debtor in the event of one or more credit events occurring.

• CLN with capital guarantee at the end of the term
  If there is a guarantee that the nominal amount of the CLN will be repaid even in the event of one or more credit events occurring a corresponding reduction in the yield will have to be accepted for this collateral. If one or more credit events occurs the ongoing coupon payments on the CLN will be suspended. As a result, the CLN investor’s maximum loss will be limited to the loss of the outstanding interest payments only.

• CLN without a capital guarantee at the end of the term
  If there is a guarantee that the nominal amount of the CLN will be repaid even in the event of one or more credit events occurring a corresponding reduction in the yield will have to be accepted for this collateral. If one or more credit events occur the ongoing coupon payments on the CLN will be suspended. As a result, the CLN investor’s maximum loss will be limited to the loss of the outstanding interest payments only.

• Repayment following default
  - Cash settlement
  - Physical delivery of a security

In comparison with traditional single-name CLN, whose value is based on

• contract-specific parameters (nominal amount, term, payment frequency…),
• the CDS premiums curve,
• the assumption of a recovery rate for the relevant reference name and
• the yield curve,

with a first-to-default basket CLN, account must also be taken of the paired default correlation between the individual reference names in the basket when fixing the price.

For a first-to-default basket CLN, its premium will be that much higher,

• the lower the paired default correlation between the individual reference names is,
• the more reference names are included in the underlying basket and
• the longer the term of the CLN.

With the help of the yield curve and the assumption of a recovery rate, the probability of default curve can be calculated from the maturity structure of the CDS premiums quoted in the market (CDS premium curve).
This is subsequently used to price credit products.

Credit risk consists of two risk components:

• uncertainty regarding the timing of the default (timing risk) and
• uncertainty regarding the amount lost in the event of a default (recovery risk).

The amount lost in the event of a default is determined by the exposure in the event of default (nominal amount of the transaction) and the recovery rate.

The amount paid on a plain vanilla CDS (credit default swap) in the event of default is: nominal amount × (1 - R), where the recovery rate R can assume values between 0 and 1, i.e. 0 ≤ R ≤ 1.

Interpretation: a recovery rate of, for example, 43 % signifies that 57 % of the nominal amount will be lost in the event of a default.

A repo transaction is a sale and repurchase agreement and describes the sale of securities with a simultaneous obligation to repurchase these securities at a preset price at a future date specified in advance. Repo transactions can be considered from two different angles. With regard to its economic function, a repo transaction is a very simple transaction with a similar effect to a collateralised cash credit.

However, when looked at more closely, it differs from the latter as a result of its specific behaviour and its legal structure. Sell/buy-back transactions describe a combination of a spot sale and a forward repurchase of securities.

Securities lending transactions are trading transactions where, from a legal viewpoint, a security is lent (and not sold) as collateral against cash or other securities. These transactions are mainly initiated by the securities side. The main difference from a repo transaction lies in the fact that a legal transfer of title occurs.

Historical refinancing rates

Historical refinancing rates are available for you to download here.

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