Interest rate cap

Interest rate cap An interest rate cap is a derivative in which the buyer receives money at the end of each period in which an interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive money for each month the LIBOR rate exceeds 2.5%.The interest rate cap can be analyzed as a series of European call options or caplets which exists for each period the cap agreement is in existence.In formulas a caplet payoff on a rate L struck at K is
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Also called an interest rate ceiling, an interest rate agreement in which payments are made when the reference rate exceeds the strike rate.