113 Swaps, Caps, Floors, and SwaptionsSwaps, caps, floors and swaptions are very usefulinterest rate securities. Imagine yourself the treasurer of a largecorporation who has borrowed funds from a bankusing a floating rate loan. A floating rate loan is a long-term debt instrumentwhose interest payments vary (float) with respectto the current rates for short-term borrowing. Suppose the loan was taken when interest rateswere low, but now rates are high. Rates areprojected to move even higher. The current interest payments on the loan arehigh and if they go higher, the company could facea cash flow crisis, perhaps even bankruptcy. Thecompany’s board of directors is concerned.
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