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Derivatives

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  • August 17, 2021
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Ratchet Floor

An interest rate derivative, or more specifically an interest rate floor whose strike is reset to the current interest rate for each floorlet. The floor rate for floorlet may be set to equal the LIBOR rate at the previous reset date minus a specified basis amount. For example, let the previous LIBOR rate be 5% and the specified basis amount be set at 100 basis points (bps), then the floor rate of the ratchet floor is 5% minus 100 bps, or 4%.


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