PRODUCT NOTEIBRD Hedging Products1Highlights•••••

IBRD Hedging Products help borrowers
manage currency, interest rate andcommodity price risk.
Borrowers benefit from IBRD’s transaction
execution experience, knowledge ofderivative pricing methods, as well as
relationships with major financialinstitutions.
IBRD’s AAA credit rating allows countries toaccess these instruments in larger volumes,
longer maturities, and lower costs than they
could secure on their own.
Using IBRD as an intermediary may saveborrowers valuable credit lines with private
sector institutions.
IBRD Hedging Products also help borrowers
build their knowledge and institutional
capacity for using derivative instruments.

In providing IBRD Hedging Products to its clients, IBRD acts as afinancial market intermediary, i.e., IBRD stands between market
institutions and the borrower, having separate financial contracts
with each. The box shows how clients benefit from IBRD’sintermediation.

Interest Rate Swaps
Interest rate swaps are individually negotiated transactions that
may be used to manage the interest rate risk of a borrower’s
underlying loan obligation. As counterparties, IBRD and theborrower agree to exchange, at specific future dates, two sets ofcash flows denominated in the same currency. The cash flows paidby one counterparty reflect a fixed rate of interest, while those of
the other counterparty reflect a floating rate of interest. There is
no exchange of principal amounts.

Interest Rate Caps and Collars
Interest rate caps and collars provide protection against risinginterest rates. Interest rate caps are individually negotiatedtransactions that set an upper limit on the interest a borrower
would pay on a floating rate loan in exchange for an up-front
premium. Interest rate collars are individually negotiatedtransactions that set an upper and a lower limit on the interest aborrower would pay on a floating rate loan.

Currency Swaps
IBRD offers a range of hedging products to help clients manage
their financial risks. Using standard risk management techniques,
these products can transform the risk characteristics of aborrower’s IBRD obligations without changing the terms
negotiated in the loan agreements. IBRD can also advise clientson the use of these solutions.
IBRD borrowers can enter into interest rate swaps or buy caps andcollars to reduce interest rate risk. Currency swaps can be used tomanage currency risk. Commodity hedges can help borrowers
reduce exposure to changes in commodity prices. Such a hedge
would have two components:• An existing IBRD loan with a corresponding interest rate andpre-determined repayment schedule.
• An overlying hedge transaction to mitigate the risk of theparticular exposure.
IBRD also offers interest rate and currency swaps in relation toborrowers’ non-IBRD debt. Clients eligible to use these products
are sovereigns with an existing portfolio of IBRD loans, are in goodstanding with respect to debt service obligations to the Bank, andare eligible for new IBRD loans.

Currency swaps are individually negotiated transactions used tomanage the currency risk of a borrower’s net loan obligation. As
counterparties to a currency swap, IBRD and the borrower agree
to exchange two sets of cash flows, denominated in different
currencies, at specific dates in the future. The cash flows reflect
payments of interest on these currencies which may be fixed orfloating, as well as exchanges of principal amounts.

Commodity Hedges
IBRD commodity hedges and advisory services allow clients tomanage exposure to commodity prices by linking repayment
obligations on IBRD loans to the commodity price. For example, acommodity-importing country exposed to the risk of commodity
price increases can structure a commodity swap so that
repayment of the principal and/or interest rate on the IBRD loan
will decrease if commodity prices increase. Conversely, for acommodity-producing country exposed to the risk of commodity
price declines, the commodity swap can be structured so that
repayment of the principal and/or interest rate would decrease if
commodity prices decrease.

1
World Bank hedging products are also available for IDA19 Scale-Up Window Financing credits. Similarly, commodity hedges and advisory services are available to
IDA countries.

IBRD Hedging Products

Updated as of December 2021

PRODUCT NOTEIBRD Hedging Products Conditions:• For purposes of managing risks. Borrowers are required to provide a rationale for the intended use of IBRD Hedging Products wheninitiating a hedge request. IBRD reserves the right to decline a request that does not meet the conditions for IBRD Hedging Products,or in IBRD’s opinion, does not seem to be suitable for project or debt management needs.
• For use with disbursed and outstanding balances of specific IBRD loans or with a group of such loans.
• In major currencies, and potentially other emerging market currencies supported by liquid derivatives markets.
• In maturities no longer than the remaining maturity on the loan or portion which is being hedged.
• At any time during the life of a loan. A borrower may choose to use IBRD Hedging Products to effectively transform its loan obligation,
on one or more occasions, whether to fix, unfix, or re-fix the interest rate, to establish caps or collars on the variable rate, or to change
the currency of obligation.
• Borrowers that wish to use IBRD Hedging Products enter into a master derivatives agreement with IBRD. This agreement provides thecontractual framework between the borrower and IBRD and allows each hedge transaction between the borrower and IBRD to bedocumented by a confirmation.
The table below lists the schedule of fees in effect for IBRD Hedging Products.
Transaction TypeFee

IBRD Hedges
Interest Rate Swaps

On a case-by-case basis

Interest Rate Caps and Collars

On a case-by-case basis

Currency Swaps

On a case-by-case basis

Non-IBRD Hedges
Major Currencies

Local Currencies

Currency Swaps

0.100%

0.020%

Interest Rate Swaps

0.030%

0.010%

See information on guidelines, pricing, and forms at http://treasury.worldbank.org/en/about/unit/treasury/ibrd-financial-products
IBRD borrowers can also make use of embedded conversion options in the IBRD Flexible Loan to manage currency and/or interest raterisks over the life of the loan. The main difference between conversions and swaps is that in the case of a conversion, the loan currency
or interest rate basis of the loan is changed, while the original loan terms remain unchanged when a swap is used.

Contact: Miguel Navarro-Martin, Manager, Financial Products & Client Solutions, The World Bank Treasury
 mnavarromartin@worldbank.org  +1 (202) 458 4722
1225 Connecticut Avenue NW, Washington, D.C., 20433, U.S.A.

IBRD Hedging Products

Updated as of December 2021