Interest Rate Cap
A strip of caplets -- European call options on a floating reference rate (typically SOFR or a LIBOR successor) at each reset date during the contract life. Each caplet pays the difference between the reference rate and the cap strike when the rate exceeds the strike on a reset date, calculated against the notional. The total cap premium is paid upfront and is non-refundable; the cap pays out only when the floating rate exceeds the strike. Caps are the cleanest insurance against rising rates for any floating-rate borrower and are widely used in commercial real estate and large corporate finance.
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Related terms
American Option · Asian Option · Barrier Option · Basket Option · Butterfly Spread · Calendar Spread
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