C o n t e n t s Purpose of this Booklet........................................................................ 2 JIntroduction ................................................................................................. 3 IBRD Hedging Products ............................................................................4 Benefits .........................................................................................................5 Eligibility ................................................................................................... 6 IBRD as Market Intermediary .............................................................. 8 3Fees ........................................................................................................... 10 Interest Rate Hedges .............................................................................. 11 Interest Rate Swaps .................................................................... 11 Interest Rate Caps and Collars .................................................16 Currency Hedges ....................................................................................... 19 1 Currency Swaps ......................................................................... 20 Commodty Hedges ............................................................................... 26 Legal Considerations ................................................................................ 29 Payment Netting ....................................................................................... 30 Accounting Considerations..................................................................... 31 4Terms and Conditions of IBRD Hedging Products ...........................32 Useful Terms .............................................................................................. 38 How to Proceed with Hedgmg Products ............................................ 39 Contact Information.............................................................................. 40 rn urpose of this Booklel T his booklet was written for information purposes only, as an introduction of BRD Hedging Products to IBRD borrowers. The booklet does not intend to provide a complete overview of financial risk management or hedging tools. Borrowers may wish to consult their £inancia1advisorswhen consideringwhether and how to use IBRD Hedgmg Products in implementmg their asset-liability management (4 strategies. I n response to borrower demand, the Interna- tional Bank for Reconstruction and Development (IBRD) is offering a new range of financial risk management products. They are designed to address the changng needs of borrowers during the life of their IBRD loans.' Using standard market techniques, IBRD Hedging Products can transform the risk characteristics of a borrower's IBRD obligations even though the ne- gotiated terms of particular loan contracts themselves may be ftued.These products allow borrowers improved risk management capability in the context of projects, lending programs, or sovereign asset-liability manage- ment. IBRD Hedgng Products include interest rate swaps,interest rate caps and collars, currency swaps and, on a case-bp-case basis, commodity swaps. 1/ IBRD loan products include Variable- and Fixed-Rate Single CurrencyLoans (SCLs),CurrencyPoolLoans (CPLs), and Fixed-Spread Loan (FSLs). For more information on FSLs, see IBRD FinanciafProducts: TheFixed-Spread Loan (August 1999). For information on SCLs and CPLs, see IBRD Financial Products: Major Terms and Conditions of IBRD Loans (April 1999). IBRD will withdraw its offer of Fixed-Rate SCLs on December 1, 1999. For information on Guarantees, see The World Bank Guarantee: Catafystfor Private Capital Flows (1998) or contact IBRD's Project Fi- nance and Guarantees Group. I Interest Rate Sw Zurrency Swaps Interest rate swaps are individually negotiated transac- Currencyswapsare individuallynegotiated transactions tions that may be used to effectively transform the that may be used to effectively transform the currency interest rate basis of a borrower's underlying loan denomination of a borrower's net loan obligation. As obligation from a fixed to a floatingrate or \Ilce versa. counterparties to a currency swap, IBRD and the bor- ' As counterparties to an interest rate swap, IBRD and rower agree to exchange two sets of cash flows, de- the borrower agree to exchange,at certain future dates, nominated in different currencies,at certaindatesin the two sets of cash flows denominated in the same future. The cash flows reflect payments of interest on currency. The cash flows paid by one counterparty these currencieswhich may be fixed or floating,asweU reflect a fixed rate of interest while those of the as exchanges of principal amounts. other counterparty reflect a floating rate of interest. No exchanges of principal amounts are involved. Interest rate caps and collars provide protection Commodity swaps are ind~viduallynegotiated against rising interest rates to users of floating-rate transactions to exchange two sets of cash flows at loan products. Interest rate caps are individually ne- certain dates in the future,where one set of cash flows gotiated transactions which set an upper limit on the is linked to the market price of a commodity or index interest a borrower would pay on a floating rate loan and the other is a pre-agreed fixed cash flow or a cash against payment of an up-front premium. Interest flow based on a floating or fixed rate of interest. This rate collars are individually negotiated transactions product will be offered by IBRD on a pilot basis. which set an upper and a lower limit (a collar) on the interest a borrower would pay on an floating rate loan against payment of an up-front premium. I BRD Hedging Products offer borrowers the following benefits: Through IBRD financial market intermediation, borrow- ~EXIBILITV AUUEU TO EIIS[ING lHRB M A N S ers benefit from IBRD's AAA credit rating and its experience gained from a long-standing presence in the Loan term choices made by borrowers at the in- derivatives markets. The IBRD's AAA credit rating ception of a loan may not be suitable later in the allows it to have access to these instruments in larger life of the loan. A borrower's risk management needs volumes, longer maturities and lower costs than its cli- may change as its access to funding from other sources ents could secure on their own. changes or expands. Using IBRD Hedging Products, borrowers wdl now be able to respond to changing cur- rency and interest rate risk profi.les over the remaining life of their outstanding IBRD loans. Hedging Products can be used in implementing a country's asset-liability management strategy to re- duce financial risks at the portfolio level. ACCESS TU RISK MANAGEMENT TOULS IBRD Hedging Products provide a step forward for many IBRD borrowing countries having no Borrowers can use these tools to build upon their direct access t o risk management instruments knowledge of risk management techniques and in- through financial markets. Other IBRD borrowers stitutional capacity for using derivative instruments. which have market access can accomplish their objec- IBRD will support countries' efforts by offering tives using IBRD Hedging Products while preserving their limited credit lines with financial market interme- workshops o n the use of IBRD Financial Products diaries. as well as sovereign asset-liability management.2 2/ For more information, contact the Financial Products and Services Department, Asset-Liabhty Management Team. for purposes of reducing dsks, Borrowers will be asked to provide a rationale for the intendeduseof IBRDHedgqProductswheninitiatingahedgequest.BRDreservestheright todedinearequestwhichdoesnotmoettheteaass n d s d o mof IBRDHedgingProductsor, in IBW5 opinion,doesnot seemtobe suitableforproject ordebtmanagementneeds I m for use with &bmcd agd o m m d q balancesof specific IBRDlams, or with a group af such loans;notavailable forhedgingdebt from sourcesother&an IBRD; in CHF,EUR,GBP,JPY,US4 andporentiallyothercurrenciessupported$liquid derivatives markets,to beconsidd onacase-bycasebasis? (availableon disbursedandoutstandingloan amounts) Interest Rate Caps and Currency Commodity Swaps Collars Swaps Swaps*r . E-q FoulLaw J s i s y j ~ t ~ p o a l h J q%%&w= J J 'I3e-m J J J F-- J J r/ * HedgesagainstCPLs,SCPsand Variable-RateSCLswill be onlvapproximatehedges. ** Offeredonexistingloans,consideredonacase-by-casebasis. n providing IBRD Hedging Products to its bor- I Execution of a hedge nrithlBRD would not adversely rowers, IBRD will be acting as a financial market affect the volume of future IBRD loans to the bor- intermediary.As depictedin Diagram 1on page 9,IBRD rower, as long as the hedges are related and limited to will stand betweenmarketinstitutionsand the borrower, existingIBRD obligations. Borrowers would be effec- having separate financialcontracts with each of them. tively transforming the characteristics of their existing Borrowers will benefit in many ways from IBRDS role IBRD obligations rather than creating new ones. as market intermediary,beyondgainingaccess to IBRD Hedging Products themselves. Because IBRD will generally be offsetting hedges executed with borrowers through market transactions, Oneimportant benefitis in transactionpricing.In most it will be able to offer only those terms ready available cases, pricing on transactions between IBRD and a in the financial markets. This could limit the maximum borrower will be based directly on the terms IBRD maturity or other terms availableon hedges to those in achieves in its dfsetting transaction with the market the particularmarkets. counterparty. In these cases, IBRD's market count-arty will not know the identity of the bor- rower requcstinga hedge from IBRD.As such, pricing on these hedges would reflect the terms achieved by IBRD based on its own superior credit standing. In other cases,pricingon transactions between IBRD and a borrower may be based on widely-avadable,pre-speci- fied screenquotes. Borrowers will benefit from IBRD's transaction execution experience, knowledge of derivatives pricing methods, as well as its numerous relationships with major financial institutions from which it can so- licit transaction bids. Using IBRD as an intermediary may save borrowers valuable credit lines with private sector institutions. I- Bondholders Borrower * - In this example,origdly, the borrower had a USD loan fromIBRD.IBRD h c e d thisbybarrowmgUSD in thebond markets,Later, the borrowerh srequestedthattheloan's currencybetransformed fmrnUSDinto JPY.Leavingthefundingandloanintact,IBRDarrangessimultaneouslyaUSD/JPYcurrencyswapwiththe borrower, and ajPY/USDcurrencyswapwith an institutionin the financial markets.The termsobtainedin the marketmansactionarepassed onto the borrowerin its swapwith IBRD. Diagram 1 shows the positionof each entity afterexecution of a currcncy swap.The batroweris obligated to two transactians,the original LBRDloan plus a currencyswapwith IBRD. In addition to its transactionswith the borruwer, IBRDhas twoothertransactions,its origioal bond market fundingand a currency swap with a market institution. It has hedged itself wrist additionalrisks from the borrower'schoice to transformitsoriginalloancurrency. ees I -- T!:& liststhe s c h e d z of fees in effect for IBRDmay revisethe fee scheduleb r n timeto time.In HedgngProducts.RaareMedatktune such cases, revised fees would apply only to hedge a of transactionmxuticm, mdnrepnyabdtwithin 60days. quests submitted after the new schedule is in effect. IBRDS policy regarding elig~bilityfor interest waivers based on timely debt service will Plso apply to timely payment of fees. - * (feesexpressed in percenttagofprincipal amounthedged) TRANSACTIONTYPE HEDGE FEES* InterestRate Swaps 1/8'/0 Interest Rate Swaps andCollars 1/SO/o CurrencySwaps CornmuditySwaps 3/80/(, * All feesarepayablewithin60daysafterexecution. 1nterestRate Hed~es 4 - I BRD borrowers may choose to reduce interest rate risk arising from their IBRD Single Currency Loans and Fixed-Spread Loans by entering into interest Any time a borrower wishes to transform its net rate swaps or interest rate caps or collars. Interest rate interest rate obligation related to an IBRD loan, it 1 risk is the uncertaintyof financialoutcomewhich arises, I could enter into a separate interest rate swap trans- 8 for example, when the interest rate characteristics of a action with IBRD. The cash flows of the swap, to- borrower's loan obligations differ from those of its gether with those of the loan,would effectivelychange 2 8 earnings. Interest rate risk can result in gains or losses the interest rate characteristics of the borrower's net dependmg on changes in interest rates, as illustrated in obligation to IBRD. Box 3. The interest rate swap would specify the terms of two streams of future cash flows, one stream to be paid by the borrower-swap pay leg-and the other to be received by the borrower-swap receipt leg-with IBRD as its counterparty. Consider wbat would happen in different interest nrtc environments if an entity borrowed USD 100 d o n nt a vlriable interest rate,d1 0 4 the USD 100 million at a fixed raa: of 7%. k c that thc bommviq cost in the &st yeas vm 6%. Assume that in t h ~sand yekt borrawhg tost &ists to 8%. What is the effea on net income? M Costof Deb4 selvies! mm-1 Bornwing (Urn m.1 Ivmm) Year 1 Year2 InterestHate H-J-:s The terms of the borrower's swap receipt legwould be with cash flows on the swap receipt leg in present value designed to cancel out, to the extent possible, the inter- terms, using current market rates. It follows that, if a est rate terms of the related loan. In the swap,the bor- borrower enters into an interest rate swap to effectively rowerwould receivefrom IBRD interestamounts match- transform the interest rate basis on its loan which car- ing those, to the extent possible, which the borrower ries either a fixed rate or spread to LIBOR that is higher owes on the underlying loan at each future payment than prevailingmarket levels, (i.e., the borrower's swap date. receipt legcash flows would be above-market), then the borrower should expect that the rate or spread achieved In exchange,on its swappaylegthe borrower would owe on its swap pay legwould be sirmlarly above market. IBRD new terms based on its choice of either a floating rate LIBOR plus a L e d spread), or a fixed INTERERAIR VAAIA~LE-RATE SWAPS SKLS interest rate (the fixed rate equivalent of LIBOR plus a spread).The level of the fixed interest rate or the appro- The spread to LIBOR in the lending rate for Variable- priate spread to LIBOR payable by the borrower would Rate SingleCurrencyLoans is variableand depends upon normally be based on that which is obtained by IBRD in IBRD's cost of related funding. Because the variable its offsetting swap with a fmancial market institution. spread is not replicable using standard market instru- ments, only an approximate hedge is possible. For in- On occasion, such as when combining the execution terest rate swapsagainstthis loan product, IBRDwould of several transactions or when IBRD does not un- set the borrower's swap receipt leg at LIBOR "flat" dertake an offsetting market transaction, the level of (without a spread). The result is that after esecuting a the fixed rate or spread to LIBOR payable by the floating-to-fied interest rate swap,the borrower would borrower would be calculated using current market have been able to fix the LIBOR portion of its variable quotes obtained from pre-specified, widely available rate, but the variable spread could still change. See broker screens. examplein Table 2. Whether using the market transaction approach or screen-based rates, the appropriate fixed rate or spread 4/ IBRD plans to make available on its website, refer- passed On the borrower be that enced at the end of this booklet, tools which borrowers which produces cash flowson the swap pay leg, which can use to estimate indicative swap rates for their loan when calculated in present value terms, would equate terms. El nlerest Rate Hedges m nterest Rate Hedaes BOX 5: Esainple of an Interest Kate S\\.al Principal Outstanding Payable (USDmillion) PO RemainingPrincipal) on (USD mlllian) LISI)60 LSD UBOR +~ lylrradc USD 10 USD 50 USDLIBOR+d b l esprend USD 10 USD40 USDLIBOR+d l rspread USD 10 USDLIBOR+vnriabltspread Ern 10 HypotheticalFioathg-to-FixedInterestRateSwap I BorrowerInterest Loan PrincipalOutstanding Semester (USDmillion) *Ficdcutk e donlBRDmarketupospwon. w BotrowdaObligation-Net ofLoanandSwap ' BarmwuNetlntcrtst Principal Rate Papbk Duc (% on RcmniningPrincipal) (IjSD million) 6.M%+Ynrisblcsprcadonloan LTSD 10 6.00D/o+~Prinbksped QD lopa USD 10 6.Wh+nnablespreadonlaan USD 10 600D/n ++&Me s p d 1x1loan USD 10 6.000/0+miablc spremdon km USD 10 6.00%+~xiablcspd Lornnn USD 10 nterest RaIf! H~?dn~s A borrower map prefer a loan with a variable n . - rate of interest, but may require assurance that - - le of ;In Intcrcst the interest rate \dl not rise above a masimum level. An interest rate cap or collar would achieve this objective. 10 - . INTERESTRATEGAPS g 8 2 6 By paying an up-front premium, the borrower could t 4 -- -- -- buy an interest rate cap which would ensure that the i '* -- - --- - - - - -, borrower's floating rate index (typically, LIBOR) on a - - 1 I loan would effectively never exceed an agreed "strike" 0 1 1 2 3 4 5 6 7 8 9 101112131415161718 rate. If at any reset date, the floating rate index is reset at Semesters +LIBOR Cap a rate above the borrower's strike rate in the cap, the borrower would still pay the prevailing rate on the un- derlying loan, but would receive payments from IBRD In the above flustration of a cap, if on any reset date, under the cap agreement equal to the dfference between LIBOR is reset at a rate above the 7.50% strike rate, the the floating rate index and the strike rate, resulting in a bo~roulerwouldPay 7.50% plus the loan's spread over net payment to IBRD at the agreed strike rate, plus any LIBOR. time the LIBOR rate is reset beloul the applicable spread. strike, the borrower would pay the LIBOR rate prevail- ing on the reset date plus the loan's spread over LIBOR. It should be noted that the cap terms will be based on the floatingrate index (such as LIBOR), and would not - include the loan's spread above the index. In choosing the appropriate strike rate, borrowers should factor the effect of the spread over the floating rate index into their estimates of the maximum interest they will effec- tively pay. Diagram 2 illustrates how an interest rate cap operates. A collar consists of a cap, as described on previous page, as well as a floor, as described below.In an interest rate collar,reset rates on a borrower's floatingrate index areeffectivelylimited w i ha rangebetween the collar's cap and floor strike rates. The inclusion of the floor serves to effectivelyoffset the premium payable by the borrower on the collar as compared to a cap. In an interest rate floor IBRD would owe the borrower an up-front premium in exchange for an agreement that if on any reset date the floatingrate index is reset below an agreed strikerate, the borrower would s d pay the pre- premiumdue on the capis exactlyoffset by the premium vaihg rate on the underlyingloan, and would also owe to be received on the IBRD interest based on the dfferencebetween the float- ing rate indexand the strikerate, resultingin a combined Diagram 3 illustrateshow an interest rate collarworks. payment to IBRD at a rate equal to the agreed strikerate In the illustration,the borrower's effectiveLIBORwould plus applicable spreads. Similar to the cap, the strike always be at least 4.00°/o, but never above 7.50%. The rates in the interest rate collar would not include the effective loan rate would be the effective LIBOR rate loan's spread over the floatingindex. Borrowers should plus the loan's spread. take such spreads into account when determining ap- propriate cap and floor strike rates. The premium income whlch borrowers would gen- erate by selling IBRD an interest rate floor would be used to reduce or offset the premium due to IBRDon the purchase of an interest rate cap. B ~ ~ - 5/ IBRD offers only floors which are part of collar trans- actions. Premia on floors cannot exceed those of associ- rowers can execute a "zero cost" collar,where the ated caps. to maturity of the cap or collar, the level of market interest rates, and the risk-free interest rate in the cur- Prema on caps and collars u~LUbe billed at hedge execu- rency of denomination. tion and are due midun 60 days from execution date. Borrowers can rely on several general principles whch The level of the prernia charged by IBRD for caps and would affect the premia and should consider these in collars will be determined by the market. When IBRD selecting the terms of their caps or collars. Typically, agrees to provide a cap or collar to a borrower, it wdl premia wild1 be hgher when rates are volatile since the generally execute an offsetting transaction in the finan- Likelihood of rates reaching the cap or floor strike is cial market, and will use the pricing achieved as the greater. Prenua are tugher for longer maturities for the basis for its premium to the borrower. same reason. The determinants of the pricing of interest rate options are, most importantly, the volatility of interest rates, as well as the suike or cap/floor rate selected, time I A borro\vcr may face budgetaq constraintson the amountof fundsavailable fordebt service. A cap would ensure that the floatingmtc of interest would neverexceed the contractuallevel, and thus would limit the maximum intercst due. P A borrower with a floating rate loan may want to purchase insurance against a sharp rise in interest rates. It would be williq to trade off the opportunity for interest savings in low rare environments in exchange for a lower premium on purchase of a cap, The borrc~wer could purchase aninterest ratecollarfrom BRD. I BRD borrowers may choose to reduce currency Currency risk in a transaction is the uncertainty of risk arising from their IBRD Fixed- or Variable- financial outcome related to exchange rate movements. Rate Single Currency Loans, Currency Pool Loans, It arises, for example, when the currency owed by a Single Currency Pool Loans and Fixed Spread borrower is different from the currency of its earn- Loans by entering into currency swaps. In contract- ings. Depending on exchange rate movements between ing an IBRD loan, borrowers commit to a liability the two currencies, unpredictable gains or losses are that will be part of their balance sheet for perhaps incurred. As demonstrated in the example in Box 7, if up to 25 years. The choice of loan currency is a the currency owed on a loan appreciates relative to the fundamental decision which borrowers should care- currency of the borrower's revenues, the borrower fully consider during loan preparation, since cur- would experience a fmancialloss. hkewise, again would rency risk affects both principal and interest pay- result if the reverse were true. ments. However, a borrower's debt management risks and needs can change over time. Currency swaps can be used as a tool for reducing borrow- ers' currency risk. 1 Coosider the effect of exchange rate movements on a bomwds net income if its exporr - - 1 eaaJngsklreinUSDwhileitsdebtisinEUR Assumeinyear I thattheexchangerareisUSD 1.03/ 1 EUSi and theEUBappreciatestoUSD 1.12/EUR by thesecondyear.Whatis the effect 04net incum? Debt Exchange Debt Net E m Service Rate sixvice hwme rn) meqi) m@4) Year I 100 95 1-03 97.85 2.15 Year2 100 95 1,12 106.40 (6.40) !\ borrower managing risk at the 1r1an portfolio level with a strategy of maintaining the currency composition of its debt at 609'0 USD and 40% EUR mav have acquired in- creased access to EL'R funding from various sources. The borrower could decide t o hedge n larger proportion of its lRRD EUR debt into USD in order to maintain the desired currency ratios. :I project's export markers may ha\.e developed differently than originally anticipated. The currency of the loan does not correspond to the currency of the project's earnings. The borrower may decide to enter into n currency swap to change the obligation into the same currenq as the revenue streams. A borrower wishing to transform the currency of obli- and interest amounts matching those due by the bor- gation on an existingIBRDloan could enter into a sepa- rower on the loan at each payment date, to the extent rate currency swap transaction with IBRD. The swap possible. transaction would specify the terms of two streams of future swap cash flows, one stream to be paid by the In exchange, the Pay On its Pay borrower-swap pay leg-and the other to be received legprincipaland interest amounts at each payment date Iby the borrower-swap receipt leVith IBRD as its in its preferred currency and interest rate basis (fued or counterparty. floatinginterest rates). Currencies available for payments on the target cur- The borrower's swap receipt leg would be designed to rency leg of the swap are CHF, EUR, GBP, JPY, and cancel out, to the extent possible, its currency obliga- USD. Other currencies may be available on a case-by- tions on the IBRD loan when the cash flows of the case basis. A market exchange rate (typically, the spot swap and the loan are netted together. This would be rate as of the effective date of the swap) is used to achieved by having IBRD owe the borrower principal convert the ~ r i n c i ~amounts of the vehicle currencv a l into the target currency at the rime of negotiation of use the pricingachieved as the basis for pricingits trans- the swap.The exchange rate be used forallprincipal action with the borrower. exchangesduring the life of the swap. The fixed interest rate or the appropriate spread to Borrowers have a choice of fixed or floating (typically LIBOR payable by the borrower would be that rate or LIBOR) interest rates in the new currency.The level of spread which would equate, in present value terms, the the fixed rate or spread to LIBOR would be determined pay leg of the swap with the receipt leg, using current by the market.IBRD would executean offsetting trans- market rates in the relevantcurrency. actionin themarketwith financialinstitutionsandwould In theexamplesbominTable3,supposeaborrowerdecidedto convertaparticularm c h eof itsUSD 60d o nFixed-RateSCLintofixed-rateEUR begmmgthe 13thsemesteroftheloan's Me.Theloan's cashBows are showninthe firssectionofthetable.Thebarrowerwouldcontinuetorepaythe loanas o i p d y agreed. h addition,it would enter into a c m e q swap agreementwith LBRD having the followingcbpracreristics. Bommd8 SmpRe@& Intheswap, h ebarsowetwouldstandtoreceivepaymentsfromIBRDax eackfuturepaymentdate USDinterestandprincipal amountsto offsethose dueon the loan. Bomds SwspPaplmc~.T ~borrowerwould be tequltEd topayto IBRDinterest andphcipa G amounts inEUR which we based an the interestrateandexchangerate termsachievedby IBRDinit! ogsetdng& d a l w k e t transadon.Note that in the swap all hme principal amounts doe by tfrt banowwin EURarecalctilacedusingthe sameerrchnngeratedeterminedarinceptionof theswap. & ~ ! N g O ~ h h t h e p a y m edamoftheunderlyingIoanandswaparefigys)aduonized, o t atthe theofbilliag,~mot.m~ payableby anddmto thebomwcrw d be oettedasofeachpayment daa fn tSlr m p l e , thE bo&s netobhgadon as of eachpayment date isa W interestrate of 6.000honthcoutsh@ding pmindpdamount,plusrepaymeatofprincipal ofEm4.31 million on e a e h m t d a t c . USD 60 million Tranche of Fixed-RateSCLwith 9Years of RepaymentTerm including 3 Years of Grace Periodin 7th Year Kcn1:lining I.o:ln Intcrvsr I .():inI'rir~cip;~l I .t xin r3rincip:ll ) ~ ~ r s ~ t n d ~ n y : ( Ri~tcP:L~~IIIc. \':I\ ahlc hc~i~cstcr it-SDn~iIlii)nj (" (1.mm~lli~rnj # 8t In Kcm:un~ngI'ri~lcipdj l i ['511 .if I -.12.5'),!> I'SD5 14 1'SL> 25 -.12;":, 1'51)3 I 5 131) 31 -.12s' 151) 5 i t 10 1'513 l i -.[2.5"$,, t ' h D i 1 L'SI) 111 -.125" I-hlli I #. I H I :SD i 7.12.?' ,, L'>Il5 61 TJ radeDate FX: c n i ~ ~ I c r r u HypotheticalCurrencySwap from USD into EUR - - - Rcm:lininp 150rro\vcr Horro\vc.r 1 1{~*111~inin,c tlc ~rr~,\vcr l%~~rra>\vcr I'rincilial Sa-.11i R;ltc Principal I'rinc~pal S\wp Kart I'r111cip:11 I.rrnn ( )i~tstnndln~ Krcci~thlc Kccci\-;tl~lc I O u ~ s ~ : ~ r n I , n p Pa>-:~hlc' 1',1!~:1Illc Scmesrcr (1S D rnn.] 1 (."so om Kcm. Prin.) tL'SL3 rnn.) ( I R . ( I .i n . tl'l'R 1nn.j ' 13 I. 51) 34 I -, 1 ;, L ;Sl>.i I ~ L RSO 6.1n r! ,, I:,~.R I4 1>1) 25 -.I ?id),, I'SD 5 11 1:I'lZ 21.55 0 , I M l " ~ I,.[ R 4.71 l i 15D41 -. 1:;"., 1'51) 5 I-.LR 1T.24 0.1111,' l.;L'l{ 4,lI $, I (I 1'511 15 ..,, -.l?Y<, 1-51)5 1 f:L:K 1203 ( > , ( M Y s I..C'R -!..?I 1- I SL>I l 1 -.12.i",. I SD5 IILH 8.62 hd 1I" I:( R 4.31 IS [ ' S D 5 -.I?.?*;, I 51) 5 I I-IX 4.31 (>,IN 1'' [:['I<4.31 1' I.ixctln r c hnccrlc ~ nIHKI)nj:irkcr rr:in>:~cr~c~n. Borrower's Net Obligation-Net of Loan and Swap Kcrnain~n,~ hr.1 l3orri)wcr l C t \cr I'rir~c~p;~l I.I ).in I'rrnc~i 11 ( )ut.;r.uml~n~ In~crc5ttiarc Pnyahlr- l';c\-:ll)lc Scrtlc5tr.r (l.,l'll n ~ ~ i l i < ~ n l : " t l vn Rcm;iirring I'rincip:tl) f,:l-R 4..;l 1H f -1 It .i.:I 6.1kI" ., 1.1-R 4.:l CURRHY SWAPSFOR CPh,SGPS& VSCh Swaps related to Variable-RateSCLswillalsobe approxi- mate.The loan's variable spread over LIBOR cannot be For swaps related to Currency Pool Loans (CPLs) offset using standard market indices. Therefore, the and Single Currency Pools (SCPs) borrowers will LIBOR portion of the interest rate will be swapped, but be ableto acheve only approximate hedges of their loan the spread udl remainin the original currency. obligations since the currency and interest rate terms of " these loan products are relarid to the nature of the loan PARTIALMATURR~C U R R ~SWAPS~ N ~ pools themselves and to the debt fundmg them rather than to market-based indces. Currencyswaps havinga finalmaturityshorter than that Anapproximate hedge of aCPLor SCPcan be achieved of the underlyingloan would present additionalconsid- by assuming that the currency mix of the pool at the erations for borrowers. The terms of such a currency time of executingthe currency swapwould be held con- swap would require a final exchange of principal equal stant through the remaining life of the hedge. Separate to the remainingprincipal balance at the maturityof the currencyswaps could be executed to convert each of the swap and its equivalentin the target currency using the undesired currencyamounts to the preferred currency.To exchangerate agreed atinceptionof the swap. (SeeTable the extent of the actual changes in the currency compo- 4 for example.)Thswould createcash flowand currency sitionof the underlymgpool during the life of the hedge, exposure implications for borrowers whch should be the borrower couldhave residualobligationsin the origi- understood and provided for. Unless borrowers have a nal loan currency(ies). specific objective in mind, it is not recommended that such transactions be executed. IBRD will make every In each of these individual currency swaps, an ap- attempt to providecurrencyswaps for the full remaining propriate proxy for the pool's variable lendmgratewould maturity of the loan being hedged. be agreed as the interest rate on the borrower's swap - receiptleg.To the extent that the prevading pool l e n h g rate differs from the proxy on the swaps' vehicle legs, the borrower could have residualobligationsin the origi- nal loan currency(ies). (l'rincipal F,schangcs Shcrn-n( )nl!.) I ~ n n Loan Burrower Borrower Outstanding Principd Principal Principal Balance Semester Amortization Swap Reccipts Swap Payments : I .5D n~ill~,)nh:~ (1'51) rn~lli~>nj (I'SD 111iI11ons) (li.I'R m i l l i ~ ~ n s ~ 151) (11I 1 CSIl Xll -1 1.m -I I 1 IBD clrI 4 1 'SII ill 7 19) Ill - (1 1.~1) ill I 'SL) 211 8 ['SI) Ill 0 In the abo\-cesamplc, rhc born~\verhas ;I 13L3 loan with Icvcl repayments of principal due in txch of thr nine scnlcsrcrs remaining. It h:~sagreed r o a currcncy s\\.ap t;)r thc following four sclnrstcrs from 1'Sn into I(1 'R. The b(>rro\vcrwo~~lrlcc~nunueto repa! r h loan ohliption as originally apteti, plus it srands ~ to rrccivr and pay arnounrs on thr currcnc!. slwp ns illustrated ahow. At thc tinal m s t u r i ~oitlic s\vap in scmrstcr 4, the I)orrou.erwoulil stand to rcccil-c 1'SD 00 million ant1 woi~ldp:ly II.'R .54 million in a tin31 esch~ngcc>fprincipal, hascd upon rhc cscli;~ngcr:lte dcrrrmined at inception of thc suap. C ash flow risk is the risk that arises when differ- Managing the risks associated with commodity prices ences in the timing of earnings and debt service is a major challenge for many developing countries. leave cash balances at levels which are insufficient to Most commodity-dependent countries have inadequate meet debt service obligations. (Also called liquidity access to risk-hedging instruments. IBRD has begun risk.) Cash flow risk could arise, for example, when its efforts to address this need by offering commodity the level of a country's export earnings is heady depen- swaps on a pilot basis to borrowers with a demon- dent on the price of the commodity which it exports, strated need to reduce exposure to commodity price while its debt service remains constant or fluctuates changes. against a different index. n- Cash inflows based h t (Inqh IYr1u.5 arc irisuificlc~ltrlr yay d c h ~scrx-~cc Semester Cash tlow risk C; I ;1i-isc ~ \vhcn cash intlmvsand ~lcbtscnicc obligations arc not matched in ~imc. I: ommodily Hefl[es , \ Ilrrrroucr countr\ which is ;in csptrrrrr 1 ) t -ctrppcr might ~lccr~ico cntcr r inlo ;I crnrnnicrdity ';u.;ip \vIiich n-oulcl link ~ r sinrcrcsr pnymcnrs t o rliu price of roppcr. In the 5u:lp ir \\.ill pay i i i ~ h r rintcrcst rntu.; tvhc11copper priccs :Ire lugher ;i,lrl rhc Ilorrt,\vt.r ha5 more rcvcrluc cap;icir? 1 1 ,p;~!,.(311 rhr othcr I~;lntl, is' copper priccs fall. ,irid rhc I>orro\~cr\ v ~ ) L I I ~ I)c c.irning Io\\--cr rc\-cnuc, i r n,oulcl I l~cncfirf1.r 11711l;tyinyn lo\vcr Intlig;ieion.;re r rhc 1 price r ~I'oilsurli rti;lt, :is oil 1)riccstisc 2nd the horroii-cr i5 bu~+dcncd with I1ighc.r tucl crj5ts. it u ' r r ~ l l ~ l li:l\-c1~1u.crpa\.mcnr.; ciuc on its Jcbt.Tllc ~,ppc~sirc \\.oul~l:ll\cr l>ctruc, tli;lr\i-Iicnoil priccs ~icclinc,ind thc country is in ;I hcrtcr posirion rr) rc.p;t!?tlic tcrrns oi rIir sornnlo~lir!.s \ ~\vould rcquirc i~iglicrclchtscrvicc. ~ p A borrower aimingto reduce fmancial risks to a project rower on its swap receipt leg amounts matching those or sovereignbalance sheet from changes in commodity due by the borrower on the loan at each future pay- prices couldenter into a separatecommodityswap uans- ment date, to the extent possible. In exchange, the action linked to an outstandingloan.The swap transac- borrower would pay on its swap pay leg floating rate tion would specify the terms of two streams of future cash flows which are linked to the market price of a swap cash flows,one stream to be paid-swap pay leg- commodity or index. and the other to be received by the borrower-swap receipt leg- with IBRD as its counterparty Similarto Analysis would be required to determine the best index interest rate and currency swaps, the borrower's swap for hedging the particular commodity risk, since the receipt legwould be designed to cancel out, to the extent movements of index prices on varying grades or vari- possible, the terms of the related loan when the cash eties of a commohty may behave differently. It map flows of the swap and loan are netted together. This not be possible to hedge the commodity risk entirelv. would be achieved by having IBRD owe the bor- and borrowers may experience residual "basis" risk resulting from the difference in price movement of the chosen index as compared with the actual financial risk in the project or sovereign balance sheet. IBRD,actingasintermediary,would executean equaland offsetting transaction in the market with a financial in- stitution, using its AAA credit rating to gain access to swapmarket transactions at the finestterms.Thepricing acheved on IBRD's market transaction would be passed directly to the borrower through the terms of the com- modity swap. Commodity swaps will be available to borrowers only on a case-by-case basis, and wiU be constrained by the avdabitity to IBRD of offsetting financialmarket transactions. B orrowers that wish to use IBRD Hedging Prod- Prior to executing a master derivatives agreement with a ucts would be expected to enter into a market- specific borrower, IBRD will undertake a legal review based master derivatives agreement (MDA) with IBRD. regarding the enforceability of the provisions of the This agreement provides the contractual framework be- master derivatives agreement with that borrower. tween the borrower and IBRD. Once this agree- ment is in place, each hedge transaction executed Defaults under a derivatives agreement may be treated in by the borrower and IBRD would be documented the same manner as defaults under a Loan Agreement. by a legal confirmation, which would form part of the master agreement. Derivatives agreements will have cross-remedy provi- sions with IBRD's Loan Agreements and vice versa. It is expected that in most cases the ISDA Master Agreement (Multicurrency-Cross Border) published by the International Swaps and Derivatives Asso- ciation (ISDA) in 1992 will be used as the basis for the MDA between IBRD and the borrower. In special circumstances, IBRD may consider enter- ing into an individual (stand alone) forward exchange or interest exchange agreement to document a hedge transaction. Before entering into any of the above derivatives agree- ments, the borrower and IBRD must review whether the borrower has the power and is authorized to enter into derivatives transactions, and otherwise is in a posi- tion to enter into derivatives transactions suchas IBRD's Hedging Products. H edge transactions will be "free-standing" and would not entail conversion of the associated loan nor amendment of the related loan agreement. The loan in its orignal form plus the hedge transac- tion together will produce net obligations designed to achievethe desired result for the borrower.' For hedges with payment dates synchronized with the loan dates, loan billing will be net of all associ- atedhedges. k/ This is in contrast to executing hedges under the terms offered on IBRD's Fixed-Spread Loan (FSL) product, in which interest rate and currency conversions features, as well as caps and collars, are included as provisions of the loan itself. A,aryccounting standards for derivative transactions from one country to the next. Before uti- lizing IBRD Hedging Products, borrowers should consider the accounting and reporting implications of entering into such transactions. Among others, considerations may include financial statement dis- closure and volatility of income due to mark-to- market gains and losses. ;andConditionsof Hedjin~Products Disbursed and outstandjng IBRD loans de- Disbursed and outstanding IBRD loans de- nominated in a single currency:SCLs, FSLs. nominated in single curre"cy with variable rates: FSLs, Variable-Rate SCLs. CHF, EUR, GBP, JPY, USD and potentially CHF, EUR, GBP,JPY, USD and potentially others, to match the underlying obligation. others, to match the underlying obligation. USDeq. 500 million maximum volume; mini- USDeq. 500million maxlmum volume; mini- mum volume of the higher of USDeq. 3 mum volume of the h~gherof USDeq. 3 million or 10% of outstanding loan (excep- million or 10°/o of outstanding loan (excep- tions considered case-by-case); must be tions considered case-by-case); must be linked to an equal volume of eligible loans. Linked to an equal volume of eligble loans. Subject to terms available to IBRD in its Subject to terms available to IBRD in its offsetting market transaction. Depending offsetting market transaction. Depending upon the currency, swaps can be offered for upon the currency, caps/collars can be of- at least 10 to 12 years or longer, if available, fered for at least 10 to 12 years or longer, if but not to exceed the maturity of underlying available, but not to exceed the maturity of loan(s). underlying loan(s). Market terms-usually based on execution Market terms-based on execution terms terms achieved by IBRD in an offsetting swap acheved by IBRD in an offsettingswap with with financial intermeharies, or in some cases financial intermediaries. on terms which are calculated using pre-speci- fied, widely available screen quotes. erms and Conditions of Hedoing Products IBRDLoans Disbursed and outstanding IBRD loans in- Disbursed and outstanding IBRD loans of all Eligible for cluding CPLs, Fixed- and Variable-Rate types will be considered on a case-by-case Hedging SCLs, SCPs and FSLs. basis. Given complexity of pool-based loans, commodity swaps on these are expected to be approximate and executed infrequently. CHF, EUR, GBP, JPY, USD and poten- The currency of the swap receipt leg would tially others on a case-by-case basis, are avail- match the underlying obligations being hedged. able as choices for the currency of the swap Currency of swap pay leg subject to availabil- pay leg. The currency of the swap receipt ity of offsetting market transactions. leg urould match the underlying obligations being hedged. M,aximum/ Minimum USDeq. 300 million maximum volume; Subject to terms available to IBRD in its Transaction minimum volume of the higher of USDeq. offsetting market transaction. Amount 3 million or 10% of outstanding loan (ex- ceptions considered case-by-case); must be hiked to an equal volume of eligible loans. Subject to terms available to IBRD in its Subject to terms available to IBRD in its offsetting market transaction. Depending offsetting market transaction. upon the currencies in the transaction, swaps can be offered for at least 10 to 12years or longer if available, but not to exceed the maturity of underlying loan(s). If the swap matures earlier than the loan, the borrower should be aware of the final exchange of principal at maturity of the swap. IBRD recommends and will attempt to provide currency swaps for full remaining maturity of loan. Pricing Market terms-based on execution terms Market terms-based on execution terms Determination achieved by IBRD in an offsetting swap achieved by IBRD in an offsetting swap with with financial intermediaries. financial intermediaries. wins and Conditions of Hedyillg Produds p p p - ~ - ~ p INTEREST RATESWAPS INTEREST RATECAPSICOUARS Effective date to coinclde with interest pay- Effective date to coincide with interest pay ment date. ment date. Synchronized Payment Dates: Payment dates Synchronized Payment Dates: Payment dates -c &LA -"----..!--A .l.-..- -L- .La - C - L ---- -- --!I-,.-"---.-- L 2 A-.l.--- - c derlying loan. At each payment date, the underlying loan. At each payment date amounts IBRD owes to the borrower in the jf the floating index esceeds the maximun , . 1 7 . , 9 . swap would be netted agalnst amounts tne rate agreed In tne cap or collar, amount: borrower owes to IBRD on both the under- IBRD owes to the borrower would be net lyiig loan and the swap.Unsynchronized Pay- ted against amounts the borrower owes to ment Dates: Should it be necessary for swap IBRD on the underlying loan or hedge. IF payment dates to differ from those of the the floating index is below the floor rate or underlying loan(s), the payment dates of a collar, the borrower owes related payment loans must precede those of the swap. to IBRD. Unsynchronized Payment Dates Should it be necessary for cap or coUar pay ment dates to &ffer from those of the un derlying loan(s) or hedge(s), the payment dates of the latter must precede those of the cap or collar. InterestRateBasisa The fixed rate or floating index would be NIA Borrower's Swap selected to correspond to that of the under- Receipts lying loan net obligations: for FSLs, LIBOR + spread, (or if the interest rate on the loan naa oeen rlxea, rnr appucauic L,.- 8 3 2.. c .-I . - - I :--L,-c 2 ~ ~ x c u ~ rilrc), for Variable-Rate SCLs, LIBOR flat; for Fixed-Rate SCLs, the fixed rate for the as- sociated tranche. lntetestRateBaaisc fiorrower's choice of either a fixed rate or a N / A Barrower'sSwap floating rate based on LIBOR (or other ap- propriate index as spec~fiedby IBRD) plus a spread. and Conditions ot bd-'-1 Products Effective date to coincide with interest pay- Effective date to coincide with interest ment date. payment date. Synchronized Payment Dates: Payment dates Synchronized Payment Dates: Payment of the swap are matched to those of the dates of the swap are matched to those of underlying loan. At each payment date, the underly~ngloan.At each payment date, amounts IBRD owes to the Borrower in the amounts IBRD owes to the borrower in swap would be netted against amounts the the swap would be netted against amounts borrower owes to IBRD on the underlying the borrouler owes to IBRD on both the loan. Any residual amounts owed by the bor- underlying loan and the swap. Unsyn- rower are payable together with payments chronized Payment Dates: Should it be due to IBRD in the swap. Unsynchromzed necessary for swap payment dates to differ Payment Dates: Should it be necessary for from those of the underlying loan(s), the swap payment dates to differ from those of corresponding payment dates of the swap the underlying loan(s), the correspondingpay- must succeed those of the loan. ment dates of the swap must succeed those of the loan. The fixed rate or floating index would be The fixed rate or floating index would be selected to correspond to that of the under- selected to correspond to that of the lying net obligations: for FSLs, LIBOR + underlying obligation. spread or the fixed rate acheved if the inter- est rate on the loan had been fixed; for Vari- able-Rate SCLs, LIBOR flat; for Fixed-Rate SCLs, the fixed rate for the associated tranche; for CPLs and SCPs, an appropriate rate. Borrower's cho~ceof either a fixed rate or a A floating rate Linked to a commodty price floating rate based on LIBOR in the target or index. currency (or other appropriate index as speci- fied by IBRD), plus a spread. /8% of principal amount hedged, A transaction fee of 1/8% of the princi- ayable 60 days after execution. Higher pal amount hedged, plus a premium based ansaction fees (or interest rate margins) on the cost of the offsetting cap/collar lay apply for swaps with unsynchronized executed by IBRD, are dctcrrnined on the payment dates (see "Payment Netting" trade date and payable 60 days after Dage 34). execution. For caps/colJars with unsyn- chronized payment dates, (see "Payment Netting" page 34) higher transaction fees would apply. Borrowers may choose to finance the premium from loan proceeds. Borrower may at any rime elect to termi- Borrower may at any time elect to termi- nate the swap. An Early Termination Fee nate the cap/collar. The cap/coUar, or rel- f 1/8% of terminated principal amount evant portion, will be automatically ter- will be charged, in addition to settlement minated if the related loan is prepaid. An of the mark-to-market value of the termi- Early Termination Fee of 1/8% of princi- nated swap. Swap will be terminated auto- pal amount terminated will be charged in matically if the related portion of the un- addrtion to settlement of mark-to-market derlying loan is prepaid. value. If underlying loan is swapped to another currency, the cap/collar will be automatically terminated. In this case, no Early Termination fee will be charged, but settlement of the mark-to-market value of the terminated cap/collar is required. Lmit orders, as defined on page 38, will be Lmit orders, as defined on page 38, will accepted for transactions of USDeq. 25 be accepted for transactions of USDeq. -illion or larger. 25 million or larger. CURRENCYSWAPS COMMOOITYSWAPS 1/4% of principal amount hedged, pap- 3/8% of principal amount hedged, payable able 60 days after execution. Higher trans- 60 days after execution. I-ligher transaction action fees (or interest rate margins) may fees (or interest rate margins) may apply for apply for swaps with unsynchronized swaps with unsynchronized payment dates payment dates (see "Payment Netting" (see "Payment Netting" page 35). page 35). Borrower may at any time elect to tecmi- Borrower may at any time elect to terminate nate the swap. An Early Termination Fee the swap. An Early Termination Fee of of 1/4O/o of terminated principal amount 3/8% of terminated principal amount will will be charged, In addition to settlement be charged, in addtion to settlement of the of the mark-to-market value of the termi- mark-to-market value of the terminated nated swap. Swap will be terminated auto- swap. Swap will be terminated automati- matically if the related portion of the un- cally if the related portion of the underlying derlying loan is prepaid. loan is prepaid. I\O 1nrt1a1exchange of principal. A final \'dl be offered on a case-by-case basis. exchange of principal amounts is required Limit orders, as defined on page 38, will be for each principal amortization amount on accepted for transactions of USDeq. 25 mil- the amortization date, nnd for any hedged Lion or larger. amounts which remain unamortized at the termination date of the swap. Limit or- ders, as defined on page 38, will be ac- cepted for transactions of USDeq. 25 mil- lion or larger. A m o m i i n g swap-A swap whose notional principal ISDA+temationaJ Swapsand DerivativesAssociation. amount amortizes (decreases) over time. Because IBRD's loans normally have principal repayments due at each kg-In a swap contract, legsrepresent streams of future payment date after the grace period, a swap hedgmg such cash flows which are the obligations of each of the par- a loan would likely have an amortization schedule which ties to the agreement. Swaps usually have a payment leg matches that of the repayments on the loan beinghedged. and a receipt leg. Annuityamoharion-A method of principal amortiza- Levelrepayment ofpnnc~pal-A method of principal tion on a loan wherein the principal is repaid in install- amortization on a loan wherein the principal is repaid in ments over time, and the sum of the principal and interest equal installments over time, and the sum of principal of each installment (using a discount rate determined at and interest for each installment declines over time after the time of loan negotiation) is the same, assuming inter- the grace period. est rates do not change over the life of the loan. LIBOR (London Interbank OfferedR a t e m e inter- Basispoint (b.p.)--One one-hundredth of a percent. est rate at which banks lend to each other in the inter- For example, the difference between 6.00% and 6.01°/o. bank market in London. Floating rate instruments often use LIBOR as the interest rate index. Basis nkk-The risk which arises when the change in value of a hedge does not correspond in magmtude or Limitorder--=on&tions placed upon the execution of direction to changes in the instrument being hedged, a hedge request; an order for execution of an IBRD hedge leading to gains or losses. provided it can be executed at or better than a specified Bdet maturitv-A method of orincioal amortization price I I wherein the principal is repaid in one installment at the final repayment date. Mark-to-market-The process of valuingan outstandmg derivative transaction using current market interest rates U Derivative instrument-Financial transaction whose and exchange rates. Changesin the market rates compared value is derived from other instruments. Futures, swaps, to when the derivative transaction was executed result in and options are derivative instruments. mark-to-market gains or losses, depenchg on the point of view of the counterparties to the transaction. EURIBORE u r oInterbankOfferedRate+The rate at whch euro interbank term deposits w i h the euro zone Resetrat-The interest rate which is determined to be are offered by one prime bank to another prime bank. the coupon rate on a floating rate instrument for the . . relevant payment period. Fonvardswap-A swap in whch the terms and condi- tions of the transaction are agreed nou?,but do not come T ~ ~ ~ ~to-maturiq-of~aswap, - J ~ ~ into effect until a future date. 1.Negotiate and enter into master derivatives agreement with + I.cgnl I)cp:u.~rncn~ IBRD (see "Legal Considerations", page 29). I 2. Provide to IBRD (and keep up-to-date) a list of signatures of -) 1.():In L)c'r:~lnwn~..(tanr\ccoundn,: 1 officers authorized to enter into IBRD Hedging Products. :rntl 13orro\vi.r SCPI-ices 3. Submit, in original form, Hedge Request Letter and Attach- ments. Request must include rationale for use of IBRD Hedging Products, hedge terms being requested, specific IBRD loan(s) to be hedged, and limit order, if any. I IIcp.~rt~nrnr.\I.~rliilrin,~ n ~ l ~ C.11cnr:)r~trcach I 4. IBRD wiU endeavor to executehedgeswitlun 15businessdays + I ,();inD c ~ ; I ~ I I I ~);if1~ Ikc4I 1. ~ ~ 1 r 1 1 i r i ~ from receipt of the borrower's request. During approval pro- .in~li3t trrt nrcr SL~\,ICCS cess, borrower may be contacted for more information or clari- + I:in;inci:11 I'rc duct? anti Scr\.~cc., fication.IBRD reserves the right to rejecta request for a hedge Ilcp~rmmcnr.Jlnrlictiny .rncl transaction. Limit orders, as defined on page 38, will be ac- ( :licnr )urrc.:lch ( cepted for transactions of USDeq. 25 mdhon or larger. I .)-!.rc:iwr!, .\s~ct-!.i~~l~ili~vi ~ ~ ; ~ g ~ t ~ ~ ~ ~ ~ ~ t b ! . (;I.< ,up 5. Final terms of hedge will be sent to borrower promptly following execution. Borrower will be billed for up-front hedge transaction fee, payable within 60 days of execution. 6. A legal confirmation containing the terms of the hedge will be submitted to the borrower for signature. I 7. To the extent possible, loans will be bdled net of all hedge *M&~wws,Accounting obligations due on the same payment date. 9odBor;rcffewSdces c bn tact lnformation 1818 H Street, N.tV Waslungton, D.C. 20433, USA http://www.worldbank.org ~ R K E T I N GAND CLIENTOUTREACH TEAM.\Nl> TELEPHONE: 458-2596 (202) FAY:(202) 522-1588 E-MALL: LEG New Products@worldbank.org WEBSITE:http://www.worldbank.org/legal