Cap


The cap is an agreement to limit interest rate risk and allows the buyer a certain planning certainty as the maximum interest rate is limited to the cap strike rate. The cap buyer participates in falling money market rates in exchange for paying an option premium.

  • Maximum interest rate = cap strike
  • Compensation payment = max (reference rate - cap strike, 0), i.e. the buyer receives a payment equal to the difference between the reference rate and the cap strike if the reference rate (e.g. 3-M Euribor) is above the cap strike on the fixing days.

Example:

Underlying transaction: Financing

Cap

Interest rate hedging with a maximum interest rate of 3%

Cap

 

Collar

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The cap agreement can be customized to meet your needs and those of the underlying transaction:

  • Interest rate ceiling (Cap strike)
  • Notional amount and currency
  • Term
  • Reference rate
  • Amortization structure
  • Roll-Over Dates

In the event of early termination, the cap can be sold in the market at the current market value.