Constant Maturity Swap Capped

Definition

The Constant Maturity Swap Capped (CMS Capped) is a swap type structure comparable to a standard IRS whereby the
customer buying the CMS Capped pays a periodically revised long-term rate in exchange for receiving a short-term rate
(Euribor). The Capped CMS can also be called a floating IRS since the IRS rate is periodically revised. A cap hedges the
upside risks to the floating IRS rate.

The buyer of the CMS Capped, who thus pays the long-term rate, can benefit from favourable developments, that is
decline in long-term rates. The cap hedges against possible increases.

Scenario

Example:

You borrow based on the three-month Euribor (plus credit margin) and wish to hedge yourself against increases in
short-term rates. You also want to benefit from any possible decline in long-term rates. You decide to purchase a
CMS Capped with a five-year term. You pay the floating IRS rate, revised every three months and is limited on the
upside by the exercise price of your cap. In exchange, you receive the three-month Euribor.

You borrow at the three-month Euribor rate with roll-over:

Customer ING
Three-month Euribor plus
credit margin

In this situation, you are fully exposed to the risk of short term rate increases.

You purchase a five-year CMS Capped against the three-month Euribor:

A 5-year floating IRS (revisable every 3 months)
=3.32% (for the 1st quarter) with a cap at 3.50%
Customer ING
3-month Euribor

You pay the five-year floating IRS rate (3.32%), which is revised every three months and limited on the upside by
the 3.50% cap. You receive the three-month Euribor.

Every three months from the initial date, therefore, the floating IRS rate is compared with the cap's strike rate based
on a predetermined calendar.

Possible scenarios on the exercise date:

• If the floating five-year IRS rate is higher than the cap strike rate:
you pay the cap strike rate for this period.
• If the floating five-year IRS rate is less than the cap strike rate:
you do not exercise the cap and borrow at the floating market IRS rate for this period.

The product files for derivatives on the Website are provided for information purposes only, independently of any contractual relationship and/or unilateral undertaking from
ING. The information is given without any guarantee or liability on the part of ING. The information should never be considered as a direct or personal recommendation,
advice or request to purchase or sell any financial instrument whatsoever. These product files are merely a means for the reader to make an assessment; readers are free to use
them as they deem fit and at their own responsibility.
In addition, it is impossible for us to give exhaustive details of all derivatives and derivative strategies on this site. Please contact a Treasury Sales Advisor if you require
further information on specific hedging techniques.
 Terms and conditions

• Term: usually one to five years (maximum of 20).

• Minimum amount: depending on the underlying structure, minimum of EUR 1 million.
• Costs: no cost.

Advantages of the CMS capped :

• The borrower can benefit from a decline in long-term rates and is despite everything protected if these increase to
above the cap rate.
• The CMS Capped is flexible: delayed, amortising, step-up.
• The market is liquid: the transactions can be returned at any moment (Buy Out).
• The CMS Capped does not involve an exchange of funds.
• Simple admin, off-balance sheet.

Risks

• The floating IRS level guaranteed by the cap shall be somewhat more than the payer's standard IRS rate.

The product files for derivatives on the Website are provided for information purposes only, independently of any contractual relationship and/or unilateral undertaking from
ING. The information is given without any guarantee or liability on the part of ING. The information should never be considered as a direct or personal recommendation,
advice or request to purchase or sell any financial instrument whatsoever. These product files are merely a means for the reader to make an assessment; readers are free to use
them as they deem fit and at their own responsibility.
In addition, it is impossible for us to give exhaustive details of all derivatives and derivative strategies on this site. Please contact a Treasury Sales Advisor if you require
further information on specific hedging techniques.