
436 Derivatives and Risk Management
erefore,
Value of the cap = 0.003166 + 0.008522 = 1.1688%
If the notional principal is INR 100,000,000, the value of the cap = INR 1,168,900
It is important to identify whether the option is based on the price of the underlying security or on
the underlying interest rate. Typically, options on xed-income securities are written on the price of the
underlying bond, while interest rate caps and oors are options that are based on the interest rate. With
options on the price of the bond, the option price and the value of the underlying bond are directly re-
lated. at is, if the interest rate decreases, the