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Derivatives

Mortgage Bank Enters Interest Rate Hedge

Hypo Tirol Bank, an Austrian mortgage bank, has entered two swaps on the back of a recent CHF200 million (USD132.61 million) bond offering. Kirch Mair, head of asset and liability management in the treasury group in Innsbruck, said the bank first executed a swap to convert the offering to a floating-rate liability, in which it receives the 3% coupon on the bond and pays LIBOR plus a spread. Then it entered a basis swap in which it receives LIBOR plus a spread and pays Euribor plus a spread. Mair declined to disclose the specific spreads.

The firm wanted to convert the bond offering to a synthetic floating-rate liability to eliminate long-term interest rate risk because its mortgage assets provide floating rate revenue, Mair explained. Bank von Ernst and Credit Suisse First Boston are the counterparties on the swaps. Bank von Ernst was the lead manager on the offering and CSFB also underwrote the deal. They were chosen to provide the swaps because they are relationship banks, according to Mair, adding the bank requires counterparties to be investment-grade.

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