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Key Financial Market Concepts, 2nd Edition by Bob Steiner

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Cap, Floor, Collar and Zero-cost Option

Definition

A cap is a package of interest rate options whereby, at each of a series of future fixing dates, if an agreed reference rate such as LIBOR is higher than the strike rate, the option buyer receives the difference between them, calculated on an agreed notional principal amount for the period until the next fixing date.

A floor is a package of interest rate options whereby, at each of a series of future fixing dates, if an agreed reference rate such as LIBOR is lower than the strike rate, the option buyer receives the difference between them, calculated on an agreed notional principal amount for the period until the next fixing date.

A collar is the purchase of a cap combined with the sale of a ...

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