abhishreshthaa
Abhijeet S
Interest rate Options:
A less conservative hedging device for interest rate exposure is interest rate options. A call option on interest rate gives the holder the right to borrow funds for a specified duration at a specified interest rate, without an obligation to do so.
A put option on interest rate gives the holder the right to invest funds for a specified duration at a specified return without an obligation to do so. In both cases, the buyer of the option must pay the seller an up-front premium stated as a fraction of the face value of the contact.
As interest rate cap consists of a series of call options on interest rate or a portfolio of calls. A cap protects the borrower from increase in interest rates at each reset date in a medium-to-long-term floating rate liability.
Similarly, an interest rate floor is a series or portfolio of put options on interest rate, which protects a lender against fall in interest rate on rate dates of a floating rate asset. An interest rate collar is a combination of a cap and a floor.
A less conservative hedging device for interest rate exposure is interest rate options. A call option on interest rate gives the holder the right to borrow funds for a specified duration at a specified interest rate, without an obligation to do so.
A put option on interest rate gives the holder the right to invest funds for a specified duration at a specified return without an obligation to do so. In both cases, the buyer of the option must pay the seller an up-front premium stated as a fraction of the face value of the contact.
As interest rate cap consists of a series of call options on interest rate or a portfolio of calls. A cap protects the borrower from increase in interest rates at each reset date in a medium-to-long-term floating rate liability.
Similarly, an interest rate floor is a series or portfolio of put options on interest rate, which protects a lender against fall in interest rate on rate dates of a floating rate asset. An interest rate collar is a combination of a cap and a floor.