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Options

A guide to the financing options in the UK market, analysed from the perspective of the borrower.

The options are explained in terms of their three components: floating rates, caps and floors.

The mechanics and risks of each option are described, with explanations of how the risks can be managed.

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A guide to floating rates.  The official UK floating rate benchmarks are Base Rate and SONIA.

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The mechanics and risks of interest rate caps.  Caps insure borrowers against high floating rates.

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The borrower pays the floating rate or the cap rate, whichever is the cheaper.

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The mechanics and risks of interest rate floors.  Borrowers may buy favourable floors to offset the adverse floors in fixed rate loans.

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The mechanics and risks of the adverse floors contained in collars, swaps and fixed rate loans.

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The borrower pays the floating rate or the floor rate, whichever is the more expensive.

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The mechanics and risks of interest rate swaps.  A swap combines a cap in the borrower’s favour with an adverse floor.

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The mechanics and risks of fixed rate loans.  A fixed rate loan equates to a floating rate loan with a cap in the borrower’s favour and an adverse floor.

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The mechanics and risks of interest rate collars.  A collar combines a cap in the borrower’s favour with an adverse floor.

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The mechanics and risks of collared loans.  A collared loan is a floating rate loan with a cap in the borrower’s favour and an adverse floor.

all keys

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