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Structured Products for Corporates

Structured products are normally offered to corporate clients in the form of swaps, where the clients can choose from an array of products to suit their needs. The interest rate linked products fall into one of the two categories - Asset side and Liability side. On the Asset side, the client has an asset that produces regular interest payments (floating or fixed). On the Liability side the client has a floating or fixed rate liability.

Broadly, there are various kinds of structured products that a client may do based on his underlying requirements and views about the asset class:

  1. Cost reduction products
  2. Yield enhancement
  3. Hedging products

A structured product can also be offered as a combination of any of the above categories

 

Few examples of structured products are as follows:


Range Accrual Swap (or, simply 'Range Accrual') - Yield enhancement

Client receives a coupon for each of all those number of days for which the underlying index (an interest rate, an exchange rate, etc.) stays in a pre-specified range.

A typical structure of a Range Accrual Swap is as follows:

Tenure: 5 years
Client receives: (USD 3m LIBOR + 1.00%) x D/N

where
D = no. of days during the life of the swap for which USD 3m LIBOR stays within the range of 0.00% - 7.00%
N = total no. of days in the life of the swap

Client pays: USD 3m LIBOR
Callable Q

The structure pays an effective coupon of (USD 3m LIBOR + 1.00%) p.a. to the client for the number of days the "USD 3m LIBOR" remains within the range of 0.00% - 7.00%. The client is in effect enhancing his yield by taking a view on future "USD 3m LIBOR".


Range Accrual - Cost Reduction & Hedging

Tenure: 5 years
Client receives: (USD 3m LIBOR) x D/N

where
D = no. of days during the life of the swap for which USD 3m LIBOR stays within the range of 0.00% - 7.00%
N = total no. of days in the life of the swap
Client pays: 2.25%
Non-Callable

Spot ref: 5y CMS (Constant Maturity Swap) = 3.19%

This structure pays USD 3m LIBOR to the client for the number of days USD 3m LIBOR remains within 0.00% - 7.00%. The client is hedging as well as reducing the cost of his liability. If the client hedges his liability with an IRS he/she gets locked at a rate of 3.19% (the 5y CMS rate). With this structure the client gets locked at the rate of 2.25% by taking a view on "USD 3m LIBOR" that it will remain in the specified range.


Flip-Flop

Tenure: 5 years
Client receives: USD 3m LIBOR
Client pays: USD 3m LIBOR - 0.25%

ICICI Bank has the right to flip the client pay leg to 2.40% on any of the coupon payment dates. After the flip the structure becomes

Client rec: USD 3m LIBOR
Client pays: 2.40%
Spot ref: 5y CMS - 3.19%

The first part of the structure acts as a cost reduction to the client as the client receives 0.25% carry. After the structure is flipped by ICICI Bank, the structure acts as a hedge for the client's liability at 2.40%.

FX Linked Products:
ICICI Bank also offers FX linked products to its offshore GMG clients who want to hedge their currency related exposures or trade on currencies based on their views. The common products offered by ICICI Bank include Range Accruals, Options etc. with currencies as underlying.

Range Accrual Swap (with an exchange rate as the underlying index):

Tenure: 5 years
Client receives : 8.00% x D/N
D = Number of days during the life of the swap for which USD|JPY = 95.00
N = Total number of days in the life of the swap Client pays: USD 3m LIBOR
Non-callable

Short Option
Client sells AUD|JPY put option at 65.00
Expiry of option: 2 years
Premium: 2.00%