Treasury Lock Agreements

A hedging freeze is a hedging tool used to manage interest rate risk by effectively guaranteeing the current day`s interest rates on federal government securities to cover future debt-financed expenses. A cash freeze is a kind of agreement between the issuer of a security and the investor who buys that guarantee with respect to the rates applicable to a cash guarantee. In essence, the contract sets or blocks the price or return associated with this guarantee. This approach allows the investor to benefit from some kind of guaranteed return on the purchase of the asset when the cash freeze is tied to the price. If the return is blocked, it means that the investor is able to create a hedging situation that can also be used for the best benefit. While a cash freeze poses a relatively low risk to the investor, there is always a chance that the market interest rate will rise above the lock-in rate, resulting in the difference between the two interest rates being placed in competition with the seller. Here, accurate forecasting of market rate movement is the key to the success of the strategy. While it is rare, there is a chance that the market interest rate will rise to such an extent that the block rate is offset, so that the investor will no longer have returns, at least until that rate starts to fall. 4 total amount of the Sface.

If, at the end of a 60-day period, the dominant cash rate is 6.80%, the borrower receives $1,258,200 from the bank. This amount corresponds to the present value of the difference between the cash rate applicable at the expiration of the lock of 6.80% and the agreed lock rate of 6.62%. Maturity Borrowers – [current value of one basis point 1 ] x [the difference between the cash rate in effect at the time of settlement and the freeze rate] x nominal amount -[6.99] x [6.80%] ] x 100,000,000 USD – 1,258,200 USD This profit is offset by a corresponding increase in the coupon rate of bond issues, if calculated at too low a price. The result is that the actual cash component on the borrower`s $100,000,000 financing is 6.62% – the interest rate agreed in the cash freeze. If the cash rate in effect at the end of the 60-day period is less than the agreed interest rate, the borrower owes the bank a cash amount corresponding to the difference between the current term interest rate and the agreed interest rate. For example, if the agreed interest rate is 6.62% and the cash rate in effect at the end of the 60-day period is 6.50 per cent, the borrower must pay $861,600 to the bank.