- Collars.
Collars are a combination of caps and floors. The purchase of a collar enables its buyer
to ensure a maximal borrowing rate (cap), while permitting him to benefit from any fall
in rates up to the floor.
Since purchase of a cap and a sale of a floor occur simultaneously, the amount of
premium to be paid is reduced. The rate guaranteed is within a certain range.
- Swaps
An interest rate swap is a contract for exchange of rates between two companies on a
notional capital. These can be affected either directly between two organizations or
through a bank.
Swap through a bank. A bank comes between the two companies as a mediator since it
may not be easy for the companies to find counter-party. This role is played by the bank
which, of course, makes a gain in the bargain for the services rendered.
- Political risk
Political risk can be broadly classified into the following three categories:
- Country risk;
- Sector risk;
- Project risk.
- Country Risk
This risk emanates from political, social and economic instability of a country and
manifests in the form of more or less strong hostility towards foreign investments. For
example nationalization multinational enterprises. Control in certain sectors etc.
- Sector Risk.
Certain sectors are prone to greater political risk than others in some countries, through
general climate to foreign investment is not unfavorable. Included in this category is
petroleum, mining, banking and so on.
- Project Risk
Sometimes, only a project is subject to risk