Interest rate options are options with an interest rate as the underlying. A call option on interest rates has a positive payoff when the current spot rate is greater than the exercise rate.
An interest rate cap is a type of interest rate derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a payment for each month the…
Forward rate agreements (FRA) are over-the-counter contracts between parties that determine the rate of interest to be paid on an agreed-upon date in the future. In other words, an FRA is an agreement to exchange an interest rate commitment on a notional amount. The FRA determines the rates to be…
While Option premiums are largely a function of the strike price, spot price and the time to expiry, there are other major factors that affect the pricing of an Option. These are volatility (ups and downs in the price of the underlying stock), interest rate and dividends, if any, between…
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