Buying a cap option makes sure that in an upward yield environment, the interest of a variable rate loan will remain below a predetermined level (the strike price)

• If the reference rate fixed for a given period is higher than the interest rate fixed in the cap transaction, the client receives the difference between the two interest rates per principal.
• If the market rate is lower than the cap rate, then no movement of money occurs.

Floor option: the buyer of the option acquires the right to receive the difference in the principal if the reference rate fixed for that period is lower than the interest rate specified in the floor option. If the reference rate is higher, no movement of money occurs.

A collar transaction consists of buying a cap option and selling a floor option, allowing the client to keep their floating rate within a predetermined range, making it possible to plan the company's finances efficiently.

With the purchased option, you acquire protection against interest rate movements in a direction unfavourable to you, while with the option sold, you reduce the value of the protection option fee (premium), in return limiting your profit from 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 (purchased cap and written floor).

Experts

If you would like to become a client of OTP Global Markets, 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)