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Derivatives

  Derivatives   |   Terms
  • 1491
  • April 15, 2021
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Interest Rate Cap

An OTC interest rate derivative, or simply a contract on an interest rate whereby the seller (or the writer) pays the buyer, at periodic payment dates, the positive difference between the market interest rate (the reference interest rate) and the agreed strike price (the cap). The interest rate cap is equivalent to a series of call options on interest rate. For the buyer to purchase a cap, a premium should be paid to the seller. Cap expirations range between 1 and 7 years. The periodic payment may be monthly, quarterly or semiannual.


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