Lecture_13 - 13 Swaps Caps Floors and Swaptions Swaps caps...

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1 13 Swaps, Caps, Floors, and Swaptions Swaps, caps, floors and swaptions are very useful interest rate securities. Imagine yourself the treasurer of a large corporation who has borrowed funds from a bank using a floating rate loan. A floating rate loan is a long-term debt instrument whose interest payments vary (float) with respect to the current rates for short-term borrowing. Suppose the loan was taken when interest rates were low, but now rates are high. Rates are projected to move even higher. The current interest payments on the loan are high and if they go higher, the company could face a cash flow crisis, perhaps even bankruptcy. The company’s board of directors is concerned.
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