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Spain: Interest rate derivatives

A special report prepared by Societe Generale.



Spanish capital markets today can be characterized by rapid internationalization. This is illustrated in the interest rate markets by the growing predominance of Libor (London interbank offer rate) references over the domestic Mibor (Madrid interbank offer rate) references. However, local market characteristics remain strong.

In 1995, Spanish corporates and investors faced a high level of uncertainty both politically and economically, with strong volatilities in interest rates and the peseta. Managing these risks has become a major concern and the use of second-generation products is increasingly common. The most frequently-used risk management strategies are detailed in this chapter, with a distinction between the instruments geared toward borrowers and those meant for investors. All examples are illustrated with indicative prices (quoted on 29/1/96) against six-month Mibor.


Interest rate FRAs

Although today the market for long-term products has become more important, at one time forward rate agreements (FRAs) were the most popular hedging instrument among corporates. There is a market for three-month, six-month and one-year FRAs based on IMM dates, known as FRAs fijos - similar to the MEFF futures contracts on three-month and 12-month Mibor.

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