Interest rate guarantee

An interest rate guarantee is an over-the-counter option on an interest rate, commonly used to protect a future borrowing or deposit period. A borrower may purchase protection above a strike rate, while a depositor may protect against a rate below a strike. The holder normally pays a premium. Depending on contract terms, a settlement based on the excess rate, notional and period may be discounted when paid at the start of the interest period. Check strike, reset date, day count and counterparty terms; the hedge does not remove every exposure or cost.