For Borrowers of IBRD Flexible Loan (IFL), the interest rate and currency conversion options are already embedded into the loan agreement to help clients manage their financial risks.
For World Bank clients non-IBRD exposures to currency and interest rate risks can also be hedged similarly to IFL loans using free-standing derivatives. Hedging Non-IBRD exposure requires a client to have an ISDA Master Derivatives Agreement with IBRD.
Interest Rate Conversions & Swaps
Clients can transform the interest rate basis (e.g., the reference rate) of a loan obligation from a fixed to floating rate or vice versa. To access built-in conversion options into the IFL, the client can request the desired type and terms of the conversion. For IBRD loans without embedded options or debt owed to creditors other than IBRD, a client can access swaps by signing a Master Derivatives Agreement with IBRD.
World Bank borrowers can limit interest rate variability with a cap or a collar. Caps set an upper limit on the variable interest rate of the loan. Collars set an upper limit (a cap) and a lower limit (a floor) on the interest rate of the loan. Both require payment of an up-front premium to purchase the interest rate protection. For IBRD loans without embedded options or for debt owed to creditors other than IBRD, clients can access caps and collars by signing a Master Derivatives Agreement with IBRD.
Currency Conversions & Swaps
Clients can alter the currency terms of a loan obligation if risk management requirements have changed since the initial choice of loan currency. Clients can convert the currency of an IFL between the four lending currencies, USD, EUR, GBP, JPY, using options embedded in the loan agreement. To access the IFL built-in conversion options, simply request the desired type and terms of the conversion. For IBRD loans without embedded options or debt owed to creditors other than IBRD, access swaps by signing a Master Derivatives Agreement with IBRD. Availability of currency hedging products presupposes a sufficiently liquid swap market in the desired currency.
IBRD Local Currency Financing
IBRD offers local currency financing through (i) loan conversion options and (ii) free-standing local currency swaps into 25 liquid local currencies.
- Local currency conversion option: The conversion option is included in the loan agreement to enable borrowers to convert current disbursements (Automatic Conversion of Loan Currencies or ACLC) and disbursed and outstanding loan balances (DOB) into local currency, all subject to market availability. IBRD may provide the conversion by hedging through swap market transactions or funding through local currency bond issuance.
- Free-standing local currency swaps: The free-standing currency swap enables borrowers to convert disbursed and outstanding balances of existing IBRD loans into local currency without changing the terms of the underlying loan. It is subject to market availability, and borrowers wishing to transact free-standing swaps with the Bank need to enter into a Master Derivatives Agreement with the Bank. Free-standing swaps for local currencies are also available on liabilities contracted with Third Parties (non-IBRD) and assets.