Interest Rate Options Flashcards
definition
Interest rate options are financial derivatives that provide the holder with the right, but not the obligation, to receive or pay a certain interest rate on a notional amount at a specified future date.
types of interest rate options
Interest Rate Caps: Provides payments when the interest rate exceeds a specified cap rate. Used by borrowers to limit exposure to rising interest rates.
Interest Rate Floors: Provides payments when the interest rate falls below a specified floor rate. Used by investors to ensure a minimum interest income.
Interest Rate Collars: Combines a cap and a floor to limit interest rate fluctuations within a range. Used to stabilize cash flows for floating-rate debt.
Swaptions: Options on interest rate swaps, granting the right but not obligation to enter into a swap at a future date. Used for gaining exposure to swaps or hedging existing positions.
