Interest Rate Cap And Floor
An interest rate cap is a derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a payment for each month the LIBOR rate exceeds 2.5%.
Similarly an interest rate floor is a derivative contract in which the buyer receives payments at the end of each period in which the interest rate is below the agreed strike price.
Caps and floors can be used to hedge against interest rate fluctuations. For example a borrower who is paying the LIBOR rate on a loan can protect himself against a rise in rates by buying a cap at 2.5%. If the interest rate exceeds 2.5% in a given period the payment received from the derivative can be used to help make the interest payment for that period, thus the interest payments are effectively "capped" at 2.5% from the borrowers point of view.
Read more about Interest Rate Cap And Floor: Interest Rate Cap, Interest Rate Floor, Implied Volatilities, Compare
Famous quotes containing the words interest, rate, cap and/or floor:
“The house a woman creates is a Utopia. She can’t help it—can’t help trying to interest her nearest and dearest not in happiness itself but in the search for it.”
—Marguerite Duras (b. 1914)
“Whoever thinks his friend more important than his country, I rate him nowhere.”
—Sophocles (497–406/5 B.C.)
“... everyone developing
A language of his own to write his book in,
And one to cap the climax by combining
All language in a one-man tongue-confusion.”
—Robert Frost (1874–1963)
““Heaven nor hell shall impede my designs,” said Manfred, advancing again to seize the princess. At that instant the portrait of his grandfather ... uttered a deep sigh and heaved its breast. ... Manfred ... saw it quit its panel, and descend on the floor with a grave and melancholy air.”
—Horace Walpole (1717–1797)