Buying a Cap option assures the buyer that in an upward yield environment, the interest cost of a variable rate loan will remain below a predetermined level (the strike price of the cap option).

• If the market rate on the observation (fixing) date of the given interest payment period is higher than the interest rate specified in the cap option, the client receives the difference between the two interest rates at face value. However, the client will pay a higher interest rate on his or her variable rate loan for that period.
• If the market rate is lower than the cap rate, then no movement of money will occur, since the buyer of the option will not exercise his or her option right, the option will expire without payment.

Buying a Floor option in a declining yield environment guarantees that if the market rate falls below a predetermined level (floor strike price), the floor option originator will have a payment obligation towards the floor option buyer. The product works similarly to the cap option mentioned above.

A cap option can be thought of as a series of call options tied to a variable interest reference rate (e.g. 3-month BUBOR), similarly, floor can be understood as a series of put options, where the maturities of the periods coincide with the payment dates of the variable rate loan.

A collar transaction consists of buying a cap option and selling a floor option, so you can keep your floating rate within a predetermined range, making your company's finances efficient to plan.

With the purchased option, the client acquires protection against interest rate movements in a direction unfavourable to him or her, while with the option sold, he or she reduces the value of the protection option fee (premium), in return limiting his or her share of favourable interest rate movements. The collar transaction fee is actually the difference between the cap and floor option fees, i.e. the desired protection range can be achieved even at no cost by selecting the cap and floor levels accordingly.

Benefits

• The buyer of the product can choose any strike price (interest level).
• The parameters of the transaction (term, interest rate, repayment schedule) can be flexibly adjusted.
• Protection against adverse interest rate developments.
• Fully benefit from favourable changes in interest rates.
• The maximum loss for the buyer of the product is the amount of premium paid, which he knows even before the transaction is concluded.
• The transaction can be closed at any time before maturity with a reverse transaction, the value of which depends on the current market situation.

Risks

• There is a cost to the transaction (option fee).
• It is less suitable for long periods due to the increase in costs incurred.
• When the transaction closes before maturity, you may incur a loss, the amount of which depends on the current market situation.
  
  

Experts

If you have any questions, feel free to contact us.

Useful documents

These documents in English language to the person concerned shall be for information purposes only. OTP Bank Plc shall fulfil its obligations imposed by the legal regulations or requirement of supervisory authority by the documents in Hungarian language.
In the event of any discrepancy between the English language and Hungarian language versions, the Hungarian language version shall prevail.

Information on the suspension of the market making obligation (available only in Hungarian)