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. 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.
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