2012•Unpublished venueRequires access
Interest Rate Caps
R. Venkata Subramani
Open publisher page 0 citations
Abstract
This chapter presents an interest rate cap, which is a form of interest rate derivative, and an over-the-counter interest rate derivative instrument. An interest rate cap is an interest rate management tool for an entity wanting to cap the interest commitment on its debt. It serves as a protection against increases in interest rates by limiting the maximum interest rate payable on its debt. This maximum interest rate is known as the cap rate or strike rate. Interest rate caps are of two types—the first type being “to pay.” This means that for receiving an agreed premium, the buyer of this type of instrument agrees to compensate the seller of the instrument on the pay date any interest over and above the cap rate, if the benchmark interest rate is above the cap rate on the reset date. The second type of interest rate caps is known as “to receive.” This means that for paying an agreed premium, the seller of this type of instrument agrees to compensate the buyer of the instrument on the pay date any interest over and above the cap rate, if the benchmark interest rate is above the cap rate on the reset date.