Interest Rate Derivatives Caps Floors

It is simply a series of call options on a floating interest rate index usually 3 or 6 month libor. Interest rate caps and floors an interest rate cap establishes a ceiling on interest payments. In a case study we learn how to calibrate a stochastic interest rate model to market data.

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Specifically we focus on the standard derivatives.

Interest rate derivatives caps floors.

They can be used to reduce or increase interest rate exposure. Similarly an interest rate flooris 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. Among the most common types of interest rate derivatives are. Interest rate derivatives can range from simple to highly complex.

Interest rate futures caps and floors and swaptions. Interest rate floors are utilized in derivative contracts and loan. An interest rate floor is an agreed upon rate in the lower range of rates associated with a floating rate loan product. 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 lesson is part 23 of 25 in the course derivatives part 2 interest rate caps and floors are option like contracts which are customized and negotiated by two parties. Caps and floors can be used to hedgeagainst interest rate fluctuations. We derive the industry standard black and bachelier formulas for cap floor and swaption prices.