Interest rate guarantee

An interest rate guarantee (IRG) is an option on a forward rate agreement (FRA) that is handled over-the-counter (OTC). A call IRG is called a borrower's IRG or borrower option (BO).[1]

A put IRG is called a lender's IRG. As with all options, the seller has the obligation to fulfill the condition of the option.

* When exercising a borrower's IRG, the holder has the option (but is not obliged) to take a loan with a predetermined amount at a predetermined interest rate (the strike of the option) on a predetermined time period.
* When exercising a Lender's IRG, the holder has the option (but is not obliged) to make a loan with a predetermined amount at a predetermined interest rate (the strike of the option) on a predetermined time period.

In the residential mortgage industry, an interest rate guarantee is also called a locked in rate.

## Relationship to caps and floors

In interest-rate derivatives markets, an interest rate guarantee corresponds to a single-period option on a forward rate and is closely related to the building blocks of caps and floors. A Bank of England overview of over-the-counter interest-rate options notes that options on forward-rate agreements are known as interest rate guarantees (IRGs) or interest rate caplets.[2]

In market practice, a cap is constructed as a series of call options on successive forward rates, while a floor is constructed as a series of put options on successive forward rates. An individual IRG therefore corresponds to one of the component option periods within a cap or floor structure.[3]

## References

1. ↑ Tompkins, Robert (2016). Options Explained2. Palgrave Macmillan UK. pp. 440–441. ISBN 9781349136360. https://books.google.com/books?id=tta-DAAAQBAJ&dq="Interest+rate+guarantee"+-wikipedia&pg=PA441. Retrieved June 23, 2025.
2. ↑ "Over-the-counter interest rate options". https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2001/over-the-counter-interest-rate-options.pdf.
3. ↑ "Interest Rate Cap and Floor Introduction". https://zenodo.org/record/4019685/files/IrCap-30.pdf.

## External links

* accaglobal.com

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