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Interest rate swap doing your head?


Late 2007 Sales

Over the period September to December 2007, the shape of the forward curve particularly lent itself to interest rate product mis-selling.

 The position as at 1 September 2007 was as follows:
The blue dot is base rate at 5.75%. The red line is the Bank of England projected future curve. That shows the rates at which banks could have dealt in future rates in September 2007. This curve falls consistently with time into the future, showing that market deals. (The banks would not have necessarily used this curve to carry out precise pricing, but it shows the general picture.)

Clearly, any fix offered between 5% and 5.75% looks a great deal for the client – and is easier to sell. However, such a product would have been a gold mine for the bank.

Any structured collar would in this period would have been even more profitable – the downside, of course, being the increased risk of loss to the client!

Any caps sold during this period would have had a very low value, reflecting the market’s expectations of the low risk then.

Any replacement products offered in respect of this period should be examined very carefully, so as to avoid being out of the frying pan and into the fire.

Contact Windsor Actuarial at for more details.
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