Glossary




Cap-floor strategies



You can select one of the following predefined strategies, each of which uses caps and floors in various combinations:

Straddle
You can do either of the following:
Buy both a cap and a floor with the same strike price, expiry and amount.
Sell both a cap and a floor with the same strike price, expiry and amount.

Strangle
You buy a cap and floor both with the same expiry but different strike prices and notionals.

Collar
A collar protects you from the risk of rising or falling interest rates as relevant while helping to reduce the cost of this protection.

If you:

  • Buy a collar (whereby you buy a cap and sell a floor both with the same expiry but different strike prices and notionals) you are hedging yourself against rising interest rates. The premium received from the sale of the floor reduces or offsets the cost of buying the cap.
    Note You will only benefit from a drop in interest rates to the strike of the floor. If the interest rate drops any lower than that, you will have to make a payout to the seller of the collar.
  • Sell a collar (whereby you sell a cap and buy a floor both with the same expiry but different strike prices and notionals) you are hedging yourself against falling interest rates. The premium received from the sale of the cap reduces or offsets the cost of buying the floor.


Note
You will only benefit from a rise in interest rates to the strike of the cap. If the interest rate rises any higher than that, you will have to make a payout to the buyer of the collar.

Spread
You buy and sell a cap (or buy and sell a floor) with the same expiry but different strike prices and notionals.
Depending on which strategy you choose the required combination of swaptions loads automatically.

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