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BASE RATE CAPS Powered By Docstoc
					I N T E R E S T R AT E R I S K M A N A G E M E N T S O L U T I O N S


Companies that borrow at a margin over a floating rate of                                      Features
interest will incur additional costs if interest rates rise.                                   l   The Cap stands apart from the underlying loan – for example
Companies may wish to eliminate or reduce this risk by                                             it is possible to enter into a Cap with HSBC to protect debt
entering into a Base Rate Cap.                                                                     with another financial institution
                                                                                               l   A Cap can also be arranged in any major currency or linked to
A Cap may suit a business that:
                                                                                                   London Interbank Offered Rate (LIBOR)
l   Wants to protect against the risk of higher rates
l   Believes that rates may fall and wants to retain the                                       Advantages
    opportunity to benefit fully if that occurs and hence does not
    want to lock in to fixed rates
                                                                                               l   The cap protects you against adverse movements in interest
                                                                                                   rates above your chosen protection level
A Cap is an instrument that is used to set the maximum rate of
                                                                                               l   The cap allows you to benefit fully from any rate falls
interest that a borrower will pay.
                                                                                               l   A cap offers flexibility as it is totally independent from, and
To enter into a Base Rate Cap you need to specify the amount                                       does not need to match, the underlying borrowing – you may
involved, the period for which the cap is required and the interest                                wish to cap 50 per cent of your debt and leave the other
                                                                                                   50 per cent completely floating
rate or cap level at which you are seeking protection.
                                                                                               l   As a company knows the maximum rate of interest it may pay,
You will be required to pay a premium for this product.                                            it can budget much more effectively

Scenario                                                                                       Disadvantages

                                                                                               l   You need to pay a premium for an Interest Rate Cap but this
     7.0%           We pay you compensation
                                                                                                   does not always need to be cash up front

                                                                     5.5% cap level            Settlement

                                                                                               Settlement of a Base Rate Cap is linked to your interest charging
                                                     You enjoy a rate below your budget rate
                                                                                               period, typically one or three months. Using the example above,
                                                                                               HSBC will pay you the difference for every day that the HSBC
        Jan          May          Sept         Jan           May              Sept
                                                                                               Base Rate is above the 5.5 per cent cap level you selected during
              Mar          July          Nov         Mar              July            Nov
                                                                                               the period. Any compensation due is paid at the end of the
Once the premium is paid, you are protected against rises in                                   period. If HSBC Base Rate remains below the cap level, you
Base Rate above 5.5 per cent – you will never pay more than 5.5                                simply pay interest to the bank at the prevailing Base Rate.
per cent on the floating part of your borrowings (plus whatever
lending margin the Bank charges you). You know that if the rates
                                                                                               Contact points
fall, your interest costs will also fall.
                                                                                               For further information on LIBOR Caps, please talk to your HSBC
                                                                                               Manager or your local Regional Treasury Manager.
Important: Please read carefully

Issued by HSBC Bank plc, Global Markets, 8 Canada Square, London, E14 5HQ which is a member of the HSBC Group and is authorised and
regulated by the Financial Services Authority. Any member of the Group, together with their directors, officers and employees may have
traded for their own account as principal, underwritten an issue within the last 36 months, or have a long or short position in any related
instrument mentioned in this material.

Spot and forward foreign exchange transactions generally are not ‘designated investments’ as defined in the United Kingdom Financial
Services and Markets Act 2000 (the Act) and therefore do not benefit from the protections of the Act and in the Rules of the Financial
Services Authority. Any other product described in this document (including a forward extra, forward extra plus, fading forward extra,
participating forward or walk away forward contract) is a ‘designated investment’ as defined in the Act, even when used to cover a
commercial trade position.

Hedging instruments, such as caps or options, even when used to cover a commercial position, are investments under the UK’s Financials
Services and

Markets Act 2000. We are therefore obliged to warn you that these instruments are not readily realisable investments; it may also be difficult
to obtain reliable information about their value or the extent to which they are exposed. Their value may also fluctuate.

Investments can fluctuate in price or value and prices, values or income may fall against an investor’s interests.

Changes in rates of exchange and rates of interest may have an adverse effect on the value, price or income of these investments. Past
performance is not necessarily a guide to future performance. The levels and bases of taxation can change.

Derivatives can be utilised for the management of investment risk. However, derivative instruments may not be suitable for all investors, as
they may be contingent liability transactions such as swaps, so therefore please seek advice. This means that the investor may not only lose
all the amount invested, but may also have to pay an additional sum at a later date.

Compliance reference number 06-127

HSBC Bank plc, Global Markets, 8 Canada Square, London E14 5HQ

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