Interest Rate Calls and Puts

Important:

1. Remember to convert premium to future value
2. When calculate Libor interest or interest rate, no compounding, and use 360
3. For EAR, use compounding and use 365
4. Paid according to NP*(1+max(0,LIBOR-strike rate)*D/360)

Interest Rate Call + Borrow => cap max interest rate

Interest Rate Put + Lending => floor on interest received

Remember to add basis points to LIBOR in the calculations!

Interest Rate Caps and Floors are Forwards!

1. Reference rate
2. Strikes
3. Length of Agreement
4. Reset Frequency (Determine Day)
5. Notional Principles

Interest Rate Caps – series of interest rate call options (caplet), but paid arrears. So unlike pure interest rate calls, the rate is the rate D days before expiration!

Interest Rate Collar – Buy call and sell put (with large floating rate obligation in deposition) or Sell Call and buy Put (with large floating asset)