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The Eurodollar Futures and Options Handbook by Galen Burghardt

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CHAPTER 20Caps, Floors, and Eurodollar Options

Eurodollar options are the exchange-traded counterparts to interest rate caps and floors, which are traded over the counter. An interest rate cap, which pays the holder if LIBOR is above the cap rate at the rate setting date, is akin to a Eurodollar put, and an interest rate floor, which pays if the reference rate is below the floor rate, is like a Eurodollar call. Exhibit 20.1 shows the comparison between the exchange-traded and over-the-counter products.

EXHIBIT 20.1Cap and Eurodollar Put; Floor and Eurodollar Call

image

The usual cap or floor comprises a sequence of “caplets” or “floorlets.” That is, ...

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