Common Interest Rate Hedging Products

Located at 239 Trianon Lane, Villanova, PA 19085, Pacific Rim Partners, Inc., is a strategic advisory firm
specialized in corporate finance, fund raising, and risk management, led by President and Chief
Executive Yasumasa Kikuchi. In his role with the southeastern Pennsylvania company, Yasumasa Kikuchi
oversees a number of finance-and banking-related areas, including interest rate hedging.

Caps and floors are two of the most common interest rate-hedging products. By employing a cap, the
investor seeks to hedge a variable-rate loan against rising interest rates. If the interest rate rises above
the agreed upper interest limit, the bank pays the customer the difference between the agreed basic
rate and the market interest rate. As the typical cap lasts for several years, the interest rate is adjusted a
number of times throughout the duration of the products life, generally every six months. On each
adjustment date, the market interest rate is compared with the agreed cap rate. If LIBOR is greater than
the cap rate, the bank pays the cap purchaser the difference six months later. Naturally, a premium is
paid for a cap. The upside is that you are hedged against rising interest rates while enjoying profit from
stable or falling interest rates. The risk is the premium paid to purchase the cap.

On the other hand, floors are utilized to hedge investments with variable interest rates against falling
interest rates. The customer profits from this as long as interest rates remain high or even rise. If
interest rates fall below the agreed lower limit, the bank pays the customer the difference between the
agreed exercise price and the market interest rate. Floors are interest rate options that generally cover
several years while the interest rate is fixed several times over the course of a maturity period, usually
every six months. At each adjustment date, the market interest rate is compared with the floor exercise
price. If LIBOR is below exercise price, the bank pays the floor purchaser the difference six months later.
The upside is that you are hedged against falling interest rates while you continue to profit stable or
rising interest rates. Again, the risk is the cost of purchasing the floor.

While caps and floors, as well as other interest-hedging products such as collars, forward rate
agreements, interest rate swaps and swaptions, are frequently used to protect against changing interest
rates, they should be utilized by individuals or companies highly experienced in and knowledgeable with
hedging.