32.1 Rate Lock Options

Many times, lenders also offer a one-time option for borrowers to take a lower rate if market rates drop during the commitment period.

If on the Settlement Date, the advertised rate for the chosen fixed-rate period falls below the 'Locked Rate', the borrower will benefit from the lower of the current advertised Fixed Rate and the 'Locked Rate'. The benefit granted to the user to receive the lower rate at the time of settlement can be thought of as an option, specifically, the bank sells the customer a European 'at the money spot' Interest Rate swap option. The cost of this option can be calculated and should be charged by the treasury back to the line of business as an internal cost.

Oracle FTP provides the capability to calculate the 'rate lock' option cost. The general approach assumes that loan commitment information will be available in sufficient detail from the source systems to support cash flow transfer pricing using forward FTP curves and all required information describing the terms of the Rate Lock.