The new set of products will make for a welcome addition to IFM’s existing over-the-counter forex and interest rate trading services. Corporate hedgers, real estate investors, and agribusinesses seem the most likely to take advantage of the firm’s new offering.
According to IFM, the new set of products should enable firms to protect themselves against volatility on LIBOR. This is because cap and floor options can be used by firms to set rates without damaging their balance sheet.
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“Non-bank lenders such as insurance companies and pension funds have increased the need for a direct third-party provider of interest rate hedging tools,” said Eric Donovan, Managing Director of OTC FX and Interest Rates at INTFL FCStone. “We have a view that rates will continue rising, but you have to be prepared for potential volatility. Options allow you to make smarter decisions on market risk, as well as in how you access capital.”
INTL FCStone – Protection against Floating Rates
The new options will bear some similarity to interest rate swaps. They can be purchased for any notional amount and will have multiple settlements based on Libor. Unlike swaps, they will trade with a single premium and strike price.
Demand for such products has risen over the past couple of years, particularly amongst firms with larger exposure to floating rates. This is largely due to the fact that LIBOR has seen a 150-basis point (1.5 percent) increase in that time period.
“Providing straightforward solutions and transparent pricing directly to hedgers eliminates the need for potentially costly intermediaries,” noted Donovan. “Consequently, we anticipate that our OTC interest rates swap dealing business will grow significantly because of these new products.”