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Derivatives

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  • June 15, 2022
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Set-Up Cap

An interest rate cap whereby the strike of later caplets is raised to reflect higher forward interest rates, especially in steep yield curve environments where the implied forward rates are characteristically higher than spot rates, and as such the strike for later caplets could be deep in the money, making a cap very expensive. The set up cap, therefore, provides a more attractive combination of risk hedge at a lower cost.


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