Bank Hapoalim (TASE: POLI) has launched market making activity in shekel interest rate options. The new financial product allows both borrowers and lenders to hedge risk from changes in the Bank of Israel interest rate. Hapoalim is the first Israeli bank to launch options on interest rates, although some foreign banks operating in Israel offer them.
Bank Hapoalim is offering three types of shekel interest rate options: cap options, which help borrowers by setting a maximum interest rate (cap); floor options, which sets the minimum interest rate; and "swaptions", which set a particular interest rate.
As an example, with the Bank of Israel's two rate hikes in the past four months, and some economists expecting another hike this month, a borrower may seek to hedge against future interest rate hikes, and can buy a cap option on the interest rate. If the interest rate exceeds the level set in the cap option, Bank Hapoalim will compensate the borrower for the difference.
Bank Hapoalim dealing room manager Liran Carmel told "Globes", "Our entry into this market will give a big boost to trading in Israeli interest rate derivatives and to market liquidity in general. This new product can, for example, help companies trying to eliminate uncertainty about the interest rate."
Trading turnover in shekel interest rate options is estimated at NIS 100-200 million per day.
The options' maturity will be 12 months or more. Most transactions are for at least five years. Trading in interest rate options is a common practice in other countries. Carmel believes that, within a year, other Israeli banks will launch similar products, which will make the market even more sophisticated, will boost liquidity, and will reduce spreads and minimum amounts.
Carmel said, "The interest rate market will undergo a revolution, just like the one in the shekel-dollar exchange rate market."
Published by Globes [online], Israel business news - www.globes-online.com - on December 16, 2009
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