What is cap and floor trade?
The cap rate is set above the floor rate. The objective of the buyer of a collar is to protect against rising interest rates (while agreeing to give up some of the benefit from lower interest rates). The purchase of the cap protects against rising rates while the sale of the floor generates premium income.
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 a cap strike?
Strike rate: The strike rate defines the interest rate at which the cap provider begins to make payments to the cap purchaser. The lower the strike rate, the more likely that a cap provider will need to make a payment during the term of the cap.
What is the lifetime cap ceiling and lifetime floor for the interest rate?
A periodic adjustment rate is a maximum adjustment allowed during one adjustment interval of an adjustable-rate loan. The rate floor is the agreed-upon rate in the lower range of rates associated with a floating rate loan product. An interest rate ceiling is similar to and sometimes referred to as lifetime caps.