What a Derivative Is, and What Atlas Is Exposed To

1.1The loan next door

You are a junior at Blackwood & Steel LLP. The firm already acts for Atlas — Party B, once the contract this edition is about comes to be signed. Marcus Feld's team ran the acquisition of the Irish firm, Solaris Digital Assets Europe Limited, and the finance team papered the loan beside it. In September 2026 the file lands with Imogen Kell, the firm's derivatives partner — and with you. Before any of it can make sense, you need the loan, and one exhibit.

Every chapter opens and closes on the same page of paper: the Hedge Sheet, a one-page record of the loan and the hedge. Ruth Ellery, Atlas's Group Treasurer, keeps it. Here it is as it stood on the evening of Tuesday 8 September 2026 — mostly blank, which is the point. One line needs explaining exactly once: Facility B is Atlas's revolving credit facility — an RCF, borrowed and repaid as the company needs it. It is never hedged, and it never joins this sheet.

Block A is the loan. Five lines of the Facility Agreement (call it "the FA") are all this chapter needs. One: Facility A is a €35,000,000 term loan, drawn once to pay for the acquisition and repaid in a single amount on 14 July 2031. Two: its rate is Margin plus EURIBOR. The Margin is 2.75% per annum, and interest accrues actual/360 — the actual days of each period, over a 360-day year. Three: EURIBOR is a published interbank rate. It appears on a screen at 11.00 a.m. in Brussels, two TARGET Settlement Days before each Interest Period begins, and the loan floors it at zero. Four: Interest Periods default to three Months, so the rate is set afresh every quarter. Whatever the screen says that morning is Atlas's rate for the next three months; the finance edition's chapter on interest walks the machinery in full. Five: clause 17 requires Interest Cover — EBITDA to net finance charges — of at least 4.00:1, tested twice a year.

Beside Facility A sits Facility B, a €5,000,000 revolving credit facility, floating too. And note which Caldermere block A shows. Under the FA, Caldermere Bank plc — Party A in the contract to come — is Arranger, Agent and the largest Lender. That is the Agency corridor, the side of the bank that sends the interest notices. The loan itself is papered in full in our finance edition — you do not need it here.

So what, exactly, is Atlas exposed to? Not to the €35,000,000 — that is owed whatever happens, and its date is fixed. The exposure is the interest bill. Run the only table this chapter needs.

Now put the covenant beside the table. EBITDA does not move when the Brussels screen moves; net finance charges do. On the bottom line the interest bill is more than twice the top line, on the same earnings. That is how "rates went up" becomes "we are in default under clause 17". The board that met on 8 September had read this table, and the policy it adopted is where this chapter ends. First, the vocabulary.

1.2What a derivative is

A derivative is a contract whose payments are worked out from a number neither party controls. That is the whole definition. Two nouns inside it carry the rest of the book. The number is the underlying — here, 3-month EURIBOR, the same published figure the loan already lives on. The amount the number is applied to is the notional — an agreed figure for counting, which nobody lends, nobody pays and nobody owes. Two parties agree: on these dates, we will exchange payments worked out by applying agreed rates to the notional. Whatever the screen says, both are bound. Nothing is lent at the start, and under most of the family nothing is paid at the start either. The exception is the option, which charges a premium; it arrives in Chapter 3.

The contract Atlas will eventually sign says this in its own words. They are worth reading months early, because they are the plainest in the document.

Why "neither party controls"? Because that keeps the machine honest. The number is published by an administrator with its own rulebook, so both parties can check every payment from the same screen. And why an amount nobody lends? Because the parties do not need to move €35,000,000 to move the interest on €35,000,000. The principal moves once, from the Lenders to Atlas at Completion, and need not move again. What Atlas wants to change is the rule that prices its quarters, and a rule can be re-priced by exchanging differences. The notional stays on paper.

1.3The family on one frame

Every derivative you will ever meet answers two questions. How many dates? — does the contract settle once, or again and again over years? One-way or two-way? — after the start, can both parties end up owing, or only one? Four families cover the answers.

A forward is a price fixed today for one later date. Two parties agree now the rate or price at which they will deal on a named future day. When the day comes, each is bound, whichever way the published number has moved. A forward is private, sized and dated to order, and two-way: whoever is on the wrong side of the agreed price pays the difference. A future is the same promise standardised — one size, one set of dates, one rulebook — and traded on an exchange. There a central counterparty steps into the middle, so that no trader faces another. Atlas will trade no futures. Its loan has bespoke amounts and dates, and this file stays private.

A swap takes the forward's two-way promise and repeats it: two streams of payments, on the same dates over years, each stream an agreed rate on the same notional. On every date the two payments are set off against each other, so one party pays the difference. Fixed against floating is the classic, and it is Chapter 2. An option is the one-way family: one party pays a premium once and thereafter only ever receives. The seller's promise is triggered, if at all, by the underlying crossing an agreed level. On an interest rate the option comes in three dresses. A cap pays the buyer when the rate fixes above an agreed level. A floor pays when it fixes below one. A collar is a cap bought and a floor sold in one package — cheaper, because the sold floor pays for part of the cap. But that floor is a promise by the buyer, and the two-way obligation walks back in. The cap is Chapter 3.

1.4What "hedge" means and does not mean

A hedge is a second contract whose payments are designed to move opposite to the first's. The loan's interest rises when the fixing rises. So Atlas wants a contract under which it receives more when the fixing rises: laid over the loan, it leaves the total standing still. That is all a hedge is. Notice what the definition does not say — not that the cost gets smaller, but that it stops moving. When the fixing is high, the payments under the second contract run from the bank to Atlas and meet the loan's extra interest. When it is low, they run from Atlas to the bank, and the cheap loan Atlas would have enjoyed is given back. The house phrase: a hedge fixes, and does not protect. If you want protection — the upside kept, the downside covered, for a price — that is the option family. It is precisely why the cap costs a premium and the swap costs nothing at the start.

A hedge is also only a hedge while the two contracts actually mirror each other. The notional must stand against the right debt and follow its shape — constant under a bullet loan, stepping down as an amortising one repays. A notional larger than the debt is no longer a hedge but a position. A hedge of part of the loan fixes that part of the cost, and no more. The dates must match, so the differences are exchanged on the days the interest falls due. The benchmark must be the same published number the loan reads. And a floor in one contract without a floor in the other leaves a gap that opens exactly when rates go somewhere strange. Chapter 2 runs a ghost quarter through that gap; Chapter 6 turns the matching into a checklist — six ways a confirmation can quietly fail to mirror a loan. For the sheet, one line measures all of it: the hedge ratio, always stated as a percentage of Facility A principal outstanding. Tonight it reads 0.00% — the whole €35,000,000, 100.00% of Facility A principal, floats. The board has just adopted a policy about that number, and block A will carry it on every sheet to come.

1.5What a master agreement is for

When Atlas trades with its bank, the trade itself will be agreed in minutes: a recorded telephone call, a rate, a notional, done. Nobody negotiates a contract in minutes. The market's answer is to split the paper in two. Everything peculiar to one trade — the rates, the amounts, the dates — goes in a short Confirmation. Everything that should be true of every trade between the same two parties goes once into a master agreement. Who represents what; what counts as default; what happens if it all has to stop; how notices are given; which law governs. The master is signed before the first trade and amended for none of them. This is the shape of the market's recommended standard forms, and of every derivatives file you will ever open.

The third recital is the quiet one that matters. Because the master and every Confirmation form a single agreement, the trades under it are not a drawer of separate contracts, each to be performed or fought over on its own. They stand and fall together: one set of Events of Default and, if the relationship must end, one close-out and one net number owed one way. Why that design exists is Chapter 4's subject; for now, hold the shape. Hold the naming convention too. The market's forms call the bank Party A and the client Party B, so the document says "Party A" for Caldermere and "Party B" for Atlas throughout, and these chapters translate every time. And the master is not the loan. They are two separate contracts, with one bank on both sides of the corridor — a point this file will test harder than any other.

1.6The three responses, and who decided

Back to the board of 8 September, with the three-rate table in front of it. There are three honest responses to a floating rate you cannot control. Do nothing — live on the table and budget for the bottom line. The ghost above is that path's price list, and for a group with an Interest Cover covenant at 4.00:1, the bottom line is the problem. Borrow fixed — but the syndicate would not lend at a fixed rate. Term banks fund floating and lend floating, and repapering a signed acquisition facility was not on offer. Or keep the floating loan and fix the rate with someone — leave the FA untouched and lay a second contract over it. The board took the third, and recorded the decision as policy.

Read the policy for what it binds, and for what it deliberately does not. The band — not less than 50% and not more than 100% of floating-rate term debt — sets a floor and a ceiling. Hedging more than the debt is not prudence but a new position, and the ceiling will matter on a spring morning in 2027. Three years of minimum term rules out a fix that expires before the risk does. Swaps, caps and collars are the two-way family and the one-way family, nothing exotic. Relationship banks only, because whoever stands behind a five-year promise must be one whose promise Atlas can weigh. The same minute asked Ruth Ellery to invite proposals from the markets desk of Caldermere Bank plc. Mark the hat: the markets desk is Henrik Dahl's floor, dealing as principal for the bank's own account. It is not the Agency corridor that sends the interest notices. Both are Caldermere, and keeping the hats apart is a discipline every chapter will demand.

One absence completes the picture: the Facility Agreement contains no hedging covenant. Nothing in it requires Atlas to hedge a single euro, and the footnote to the exhibit says exactly that. The hedge exists because Atlas's own board decided it should. Every term of it was Atlas's to negotiate. Every consequence of it, good and bad, traces back to a minute of 8 September 2026, not to a Lender's demand. When, two years on, somebody at a board table asks "who agreed this?", the answer begins here.

1.7Why the law cares

There are three doors the law might file this contract behind, and it fits none of them. Not a wager: each party has a commercial purpose the contract serves — Atlas a loan whose cost moves, the bank a book of offsetting promises. The law does not treat a hedge with a commercial purpose as a bet. Not insurance: the payments are triggered by a published number, not by a loss Atlas must suffer and prove, so there is no policy, no insurable interest and no duty of disclosure. Chapter 3 will show you the one instrument that behaves like insurance without being it, and Chapter 14 will meet a cousin that tempts the same mistake. Not a loan: nothing is lent, and the notional is never owed. How the loan documents count a derivative when they must is a question this file answers much later. For now it is enough that the contract is what it says it is: an exchange of payments worked out from a number neither party controls. English law enforces it as exactly that.

1.8The promise of the book

Now the rules of engagement, stated once. There is not a formula in this book. Every number you meet will sit in a cash-flow table you can follow with a pencil: a rate, times an amount, for stated days, line by line. Where a figure cannot be reached that way, the book gives you the bank's figure and teaches you to read it, never to derive it. Every figure carries its basis. A rate names per annum and its day count: 2.75% per annum, actual/360. A percentage names its denominator: 100.00% of Facility A principal outstanding; not more than 100% of floating-rate term debt. An amount names its period and its days. And the rounding conventions, once. Cash is stated to the cent. Values are stated to the nearest €1,000, because that is how the bank states them. Percentages are stated to two decimal places, so a column may not sum to exactly 100.00. Every figure is worked on the full numbers and rounded once, at the end — which is why subtracting two rounded amounts can land you a cent away from the rounded answer. The glossary holds every term the edition uses.

Back to the sheet. Nothing on it has moved — today's movement was all in the boardroom.

That is the discipline of the exhibit. Block A is the loan, block B will be the hedge's cash, and block C will be the hedge's value. The book never lets cash and value share a line, a sentence or a question. What Atlas paid this quarter and what Atlas would pay if it all stopped today are different questions, with different sources. That is why block C stays blank until Chapter 9. Within the week, Henrik Dahl's desk answers the Treasurer's invitation with a page of indicative terms: a fixed rate against the floating one, on the loan's own dates. Reading that page line by line — and why its first quarter's arithmetic is not the point — is Chapter 2.