Valuation of Interest Rate Options03/09/2022 0 By indiafreenotes
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.
Call option payoff=Notional Amount × [Max (Current spot rate−Exercise rate, 0)]
On the other hand, a put option on interest rates has a positive payoff when the current spot rate is less than the exercise rate.
Put payoff = Notional Amount × [Max (Exercise rate−Current spot rate,0)]