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Derivatives

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  • June 13, 2021
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Foreign Exchange Floor

An option contract on foreign exchange whereby the seller (or the writer) pays the buyer, at periodic payment dates, the negative difference between the market rate (the reference rate) and the agreed strike price (the floor). The floor, in other words, is the minimum exchange rate that may be effected on, or affixed to, a contract. A floor is a series of floorlets. For example, a lender may buy an FX floor stipulating that the FX rate should not go below 4% even if market rates necessitate lower levels. This way, an FX rate floor reduces the risk to lenders receiving the payments denominated in a specific exchange rate and guarantees a minimum rate for their loaned money.


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