Interest Rate Management – What Is A CAP?

A CAP is based on an underlying amount of nominal capital interest and liquidity management in company a contractual agreement an interest rate ceiling. Hear other arguments on the topic with iHerb. Exceeds the agreed interest rate ceilings (strike price) in the reference interest rate (EURIBOR or LIBOR), so the seller (writer) pays the difference between the interest rate ceilings and reference interest rate the buyer of the CAP. The billing is done as in the FRA. Caps thus represent an insurance against rising interest rates for buyers, but also at the same time offer the opportunity to benefit from a lower or falling market interest rates at the short end of the yield curve. The design of the CAP premium, which is usually due at conclusion of the contract as a one-time fee is essential.

A periodic, E.g. semi-annual payment of the premium is available on customer request. Determinants of Cap currency and nominal amount runtime: 2 to 10 years of strike price: height reference interest rate interest rate ceiling: EURIBOR, LIBOR,… Rollover dates: Dates, which strike price compared with the reference interest rate. usually 3, 6, 9 or 12 months premium: usually a single premium at the beginning of the contract, expressed as a percentage of the underlying principal of the determinants can easily derive rules of thumb, which provide information about the price development of the CAP the buyer: the longer the duration, the higher the CAP premium. The higher the interest rate ceilings, the lower the CAP premium. The greater the difference between the interest rate ceilings and implied market interest level, the lower the CAP premium.

The larger the expected the CAP premium interest rate fluctuations (volatility), the higher. The agreement an interest rate ceiling using caps, variable-interest loans interest rate risk can be limited upward applications. At the same time, the possibility is held open by low or falling interest rates to realize interest savings (asymmetric risk profile). In contrast to the swap caps also then allow an interest rate hedging, if no opinion on the was formed on future interest rate course. This arises due to the asymmetric nature of caps: protection against rising interest rates benefits of falling interest rates. A cap contract is detached from the underlying transaction (E.g. credit) completed, so that this instrument can be applied also in already existing financing. Example a company completes 10 million rollover loan over 5 years on the basis of 6-MonEURIBOR + 100 BP a final due EUR and want to pay in the future no more than 7,00%. To ensure this, the company must buy a cap with a strike price of 6.00% (its upper limit of 7.00% minus the R/O credit 1,00% margin). The Bank has offered a 5-year cap against 6-sales-R/O at a strike price of 6.00% (7.00% 1.00%) a price by, for example, 250 BP. This single premium is payable on conclusion of the contract. When interest due, the strike price is now compared with the then current EURIBOR. Roland Meyer