Difference Between Cap And Floor Option

Caps are either offered over the counter by dealers or embedded in a security.

Difference between cap and floor option.

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. An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product. The difference between the strike price and the boundaries is known as the cap interval. Interest rate floors are utilized in derivative.

Cap rate or strike rate. Payoff rule for a typical cap each payment date the cap pays the difference if positive between a floating index rate and the cap rate. Caps and floors are based on interest rates and have multiple settlement dates a single data cap is a caplet and a single date floor is a floorlet. They are most frequently taken out for periods of between 2 and 5 years although this can vary considerably.

However the individual caplets and floorlets. Like other options the buyer will pay a premium to purchase the option so the buyer faces credit risk.