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Derivatives

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  • January 31, 2022
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Contingent Premium Floor

A contingent premium option in which the option is a floor (interest rate floor), where the holder is not required to pay an upfront premium. However, at expiration date, the holder will have to pay a preset premium amount if the floor is in the money. The premium for a contingent floor is typically much greater than the premium on an ordinary floor (vanilla floor), but it is contingent on the underlying rate being lower than the strike level when the option reaches maturity. Contingent premium floors are mainly used to provide protection against the downside risk in a financing deal and to take a view on volatility levels.

The contingency of premium may be particularly attractive for investors who are currently short of cash.


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