Fixed Income Caps and Floors

Overview


  • A caplet is a call option on a interest rate for a single specified period
  • A cap is a series of caplets


Thus an investor can limit the amount of interest that she will have to pay on a variable rate loan by buying a caplet on each coupon payment of the loan. (In other words, buying a cap).

  • A floorlet is a put option on a interest rate for a single specified period
  • A floor is a series of floorlets


Caplet


Contents