An interest rate cap (or ceiling) is an agreement between the seller or provider of the cap and a borrower to limit the borrower’s floating interest rate to a specified level for a specified period of time. Viewed in this context, an interest rate cap is simply a series of call options on a floating […]
Caps, Floors, and Swaptions
How Interest Rate Floors Work?
An interest rate floor is similar to an interest rate cap agreement. An interest rate floor is an agreement between the seller or provider of the floor and an investor which guarantees that the investor’s floating rate of return will not fall below a specified level over an agreed period of time. Analytically, this represents […]
How Interest Rate Collars Work?
An interest rate collar (or floor ceiling) is an agreement where the seller or provider of the collar agrees to limit the borrower’s floating interest rate exposure to a specified ceiling rate and floor rate. Analytically, this represents the simultaneous purchase of a cap(which is a series of put options)with the sale of a floor […]