A capped call option which is only exercisable at maturity. A capped call, by definition, is a call option modified to have a maximum payoff. This call option is struck at a specified strike price with a barrier above the underlying’s spot price at inception such that if the stock price reaches the barrier before expiration, the option expires and pays out the intrinsic value reflected in the difference between the barrier and the strike. However, if the barrier is far away from the spot price, the price of a European capped call will not diverge considerably from the price of a standard European option.
The European capped call option differs from its American counterpart in that the American option allows a down-side protection if exercised early. This also holds for vanilla American calls, though the down-side protection is more than compensated for by the further upward potential in case the holder continues to stick to the option. With the capped call, no further upward potential will be attainable once the cap level is reached, in which case the down-side protection takes over.
Examples of a European capped call option include: range forward contract, collar loan, indexed note, index currency option note.
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