Module 3 · Chapter 10

Collateral: the Annex and the Call

The collateral annex makes a party post cash when the hedge moves against it. This chapter reads the annex paragraph by paragraph and works out the bank’s first call for cash.

≈ 15 min read 8-question test

In this chapter

  • Why collateral cash becomes the bank’s, owed back as a debt
  • How a call for cash is worked out, step by step
  • What the annex costs Atlas, and why the bank asks for it

10.1Collateral in one paragraph

A swap can move in value against either side. The collateral annex makes the side the swap has moved against post cash to the other, so that a default would cost the other less. Atlas and Pellhaven signed it with the master agreement, as part of the same single agreement. It takes euro cash and nothing else.

Each week the bank values the trades, and it calls for cash when the value in its favour is high enough. By May 2028 rates had fallen, and the bank called for €300,000.

Key point

Collateral moves when the value of the trades moves, not when a payment falls due. Under this annex the cash becomes the bank’s, and the bank owes the same amount back.

Also in this chapter

  1. Why the cash becomes the bank’s
  2. Exposure: what the bank measures each week
  3. Threshold, minimum transfer and rounding
  4. Weekly valuation, and a short deadline
  5. Working out a call, twice
  6. Why no cash came back all summer
  7. Interest on the cash
  8. Answering the treasurer’s question
  9. The bank’s side
  10. Your job

Preview

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