It involves the simultaneous purchase (or long) of an interest rate floor and sale (or short) of an interest rate cap. The premium received from the short cap ...
What is cap floor and collar?
Interest Rate Caps, Floors and Collars are option-based Interest Rate Risk Management products. These option products can be used to establish maximum (cap) or minimum (floor) rates or a combination of the two which is referred to as a collar structure.
What is capping collaring?
Cap and Collar is a term used in connection with interest rates. A Cap is an upper limit, or maximum interest rate that will apply, while a Collar is the minimum interest rate. As such, the interest rate may vary between these two points.
What is cap and floor?
A cap limits the interest a borrower or bond issuer pays in a rising rate environment and sets a maximum level of return for the lender or investor. A floor sets a base level of interest that a borrower must pay and also sets a base level of interest that a lender or investor can expect to earn.
What is a cap corridor?
Corridor Overview. An alternative to a vanilla rate cap is a corridor, which is just two caps: one bought, and one sold. The primary intent is to obtain a cap at lower cost by selling one back at a higher strike.