Difference Between Cap And Floor Option

An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product.

Difference between cap and floor option.

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. This creates a gap between the volatilities of caps and swaptions which in turn provides an opportunity for investors to take views on future correlations and accordingly execute their trades. The difference between the strike price and the boundaries is known as the cap interval.

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. While this boundary limits the profit potential for the holder it comes at a reduced cost. Caps are either offered over the counter by dealers or embedded in a security. They are most frequently taken out for periods of between 2 and 5 years although this can vary considerably.

Interest rate floors are utilized in derivative. Broadly speaking a swaption is similar to a a cap or a floor in that it consists of a series of options.