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Procedure documentationEditing the Editing Nominal Interest (CAP) Group Box

 

In the Nominal Interest (CAP) group box on the Calculation tab page, you edit the fields of a condition that are included in amount category 105010 Nominal Interest and for which the screen sequence 105013 is set up in condition type Customizing.

In this group box, you define an interest derivative that has an upper interest limit for variable interest calculation of the hedged item. This enables you to minimize the risk of a strongly increasing reference interest rate in variable financing such as credits and loans.

If the corresponding reference interest rate exceeds the upper limit in the interest adjustment, the system determines the difference between the upper limit and the actual reference interest rate. The amount calculated with this percentage in relation to the nominal amount is disbursed to the buyer of the cap.

Procedure

You can make the following settings:

  1. In the Condition Form field, you can enter the use for the condition.

  2. Use the Rounding Category and Rounding Unit fields to control how the system rounds the resulting interest amount.

    For more information, see Rounding Numerical Values.

  3. Enter an upper limit.

    This upper limit (strike price) is the maximum interest calculation. If the reference interest rate exceeds this upper limit, the cap triggers payment.

    Example Example

    You have bought an interest cap for EUR 10,000,000.00 with a maximum interest rate of 4.5% p.a. to secure your hedged item. The reference interest rate (3 monthly EURIBOR) that applies increases in November 2008 in currency EUR to 4.733 % p.a.

    Since the upper limit is exceeded, the cap triggers payment. The difference of 0.233% for the transaction value of EUR 10,000,000.00 means an amount of EUR 5,825.00 for a period of three months with linear interest calculation. You are credited with this amount. However, you must pay 4.733% on EUR 10,000,000.00 for the hedged item.

    End of the example.

  4. Specify an interest reference.

    In exceptional cases, you can define the cap with a formula, markdowns or markups on the reference interest rate, and minimum or maximum interest calculation.

    • The system applies the minimum or maximum interest calculation if the reference interest rate is less or more than the minimum or maximum interest calculation.

    • You can use a formula to calculate the percentage.

      For more information, see Formula Editor for Financial Mathematics.

  5. The system calculates the interest according to the nominal capital.

    • If you want to use a different value, you can enter a fixed amount in the Basis Amount field, which the system includes in the interest calculation.

    • Enter an interest calculation method.

      If you have chosen the value actW / 252 in the Interest Calculation Method field, enter an interest calendar.

      For more information, see Interest Calculation Method.

  6. You can enter a payment currency that differs from the condition currency.

    When you enter a payment currency, you can enter a fixed exchange rate that the system uses for the validity period of the condition.

    For more information about the dependencies of currencies in conditions, see Currencies in Conditions.

  7. In the condition type Customizing of your application, in the Amount Category dialog structure, you can select the Amount-Based Reduction or the Percentage-Based Reduction checkboxes. This enables you to enter a reduction as an amount, percentage, or interest reference by which the system is to reduce the calculation basis of the interest calculation.

    If you use both methods of reduction, the system first uses the percentage-based reduction and then the amount-based reduction.

    If you enter an interest reference reduction, you can specify a minimum or maximum percentage rate for the reduction.

Result

You have defined a nominal interest (CAP).

More Information

Amount Category 105010 Nominal Interest

Editing the Calculation Tab Page