Difference Between Cap And Floor Option

The difference between the strike price and the boundaries is known as the cap interval.

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. Caps are either offered over the counter by dealers or embedded in a security. Like other options the buyer will pay a premium to purchase the option so the buyer faces credit risk. 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. 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. 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. Broadly speaking a swaption is similar to a a cap or a floor in that it consists of a series of options.

While this boundary limits the profit potential for the holder it comes at a reduced cost. Cap rate or strike rate.