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Derivatives

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  • January 18, 2022
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Prime Cap

An interest rate cap whose reference rate (underlying interest rate) is linked to the prime rate– i.e., the interest rate charged by commercial banks to their prime customers (most creditworthy customers). This rate is correlated with a bank’s cost of funding. It generally changes across the sector depending on macroeconomic conditions.

Prime caps are mainly used as insurance (capping mechanism) against upward movement in the prime rate.


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