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EVAP
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Posts: 19
Joined: August 23rd, 2006, 2:49 pm

Protection for zero rates

January 22nd, 2021, 2:40 pm

I have a long-term bank loan (assume LIBOR) I need to hedge. I can do this with a swap, but I also need to protect if rates go below zero - the bank always assumes greater of LIBOR or 0.

What is the best way to do this (option?) and how would I price it?
 
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bearish
Posts: 6430
Joined: February 3rd, 2011, 2:19 pm

Re: Protection for zero rates

January 22nd, 2021, 2:57 pm

You are basically short a zero strike floor. If you have the institutional capability to enter into a swap, you should equally well be able to buy an offsetting floor. Depending on the currency, that may be unpleasantly expensive (but of course just in the sense of monetizing a cost that is embedded in your loan).