A CAP is a series of interest rate options with an upper limit (strike) which the seller of the CAP guarantees to the buyer.

The important parameters for a CAP are the maturity term, base amount, strike price, reference interest rate, capital amount and premium. Once you have entered these condition characteristics, the system can directly display the cash flow. From this, you can see that the capital amount is only used to calculate the settlement payments and does not trigger a cash flow. The system also automatically determines and displays the rollover data.

At the scheduled interest rate adjustment, you can either enter the reference interest rate manually or let the system import the data to determine any interest receivable that is due. If the option is in-the-money, the system calculates this amount automatically and displays it either as an individual amount or together with the preceding payment flows in the cash flow. The system repeats this procedure for each interest rate adjustment until the transaction expires. If the CAP is out-of-the money, there are no payments on either side.

Floors are processed similarly. Purchasers of floors want to protect themselves against falling interest rates and pay sellers a premium in return for their interest rate guarantee. The purchaser claims interest receivables as soon as the reference interest rate passes through the agreed lower limit (floor).