Interest Rate Options

Sub-menu:

Published: 12th August 2014 by William Webster

Interest rate caps are a string of options on forward starting Libor. The individual option is called a “caplet” with the combined sum of each caplet’s value giving the cap price or premium.

Forward interest rates are calculated from the par yield curve. To help understand them a simple example helps.

If you borrow money for six months and deposit it for three months there is a rate of interest that you need to receive on your deposit between month three and month six in order to give you sufficient cash to repay your initial borrowing with interest. This is the breakeven or forward rate:

Buy the full article now for just £4.95

If you have already purchased this article, login to view it.

Related Documents

Short courses>Interest rate options

Interest Rate Swaps

Short courses>Interest rate swaps

elearning > Interest rate swaps

Learn about the following: What interest rate swaps are and how they work. How dealers make (and lose) money with swaps. How swaps can be used to manage risk. The key risks with swaps. How these risks can be controlled.

Using Interest Rate Swaps

Market Guides > Gap reports - how do you use them?

14th October 2009

Gap reports show you the interest rate risk you are running in your balance sheet. They put the assets and liabilities into time buckets in accordance with their interest rate repricing. From this simple approach you can obtain a table or graph of the risk being run. This normally includes a profit and loss figure that results from moving the yield curve. Gap limits are also applied in order to keep the interest rate exposure within risk tolerence. Gap reports aren't new; they are widely used and have both strengths and weaknesses. Let's find out more.