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Interest Rate Derivatives
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Caps & Floors data provides valuable information on the market expectation of rate changes and associated uncertainty. Key features of our Caps & Floors market data include real-time pricing across a range of strikes and tenors, and historical data.
Our Cap & Floor data packages provide comprehensive coverage across 14 currencies. Volatility surfaces are managed directly by Tradition’s brokerage desks. From those surfaces and using our in-house analytics expertise, we produce a broad picture across many strikes and tenors.
Combining caps and floors with swaptions can provide valuable hedging strategies and Tradition’s market data can reveal information about market expectations of future correlation.
By offering smaller, focused and more granular packages based on region and product, our clients only pay for what they need, as opposed to receiving larger data packages that need unbundling.
Real-time, Intraday and End of Day prices are available for interest rate markets providing complete flexibility on both data content and delivery method.
Interest rate risk management: Companies and financial institutions can use caps and floors as a form of risk management to protect against the risk of rising or falling interest rates. One example is if a company with a large amount of adjustable-rate debt may purchase a cap to protect against the risk of rising interest rates. Another example is if a bank with a large portfolio of variable-rate mortgages may offer their customers cap protection and then need to hedge their resulting cap exposure in the institutional market.
Yield curve risk management: In any currency movements of short tenor rates (1m to 6m) and long tenor rates (1y upwards) are related, but the relationships are complex. Those relationships can be modelled by considering, among other things, the correlation between different tenors. This enables risks to be quantified.
Hedging: Caps and floors can be used to hedge interest rate risk associated with a company’s commercial activities or of a portfolio of assets or liabilities.
Caps and floors are financial contracts that limit exposure to interest rate movement. A caps/floor is typically a series of observations and payments based on contiguous short tenor periods, for example monthly, quarterly or semi-annual.
A cap is a financial contract that limits cost of interest rate payments a borrower (the buyer) incurs. The seller provides the buyer a payment equivalent to the excess interest whenever a specified reference interest rate, such as a compounded overnight reference rate, exceeds an agreed level, the strike.
A floor is a financial contract that guarantees a minimum interest income to a lender (the buyer). The seller provides the buyer a payment equivalent to the shortfall interest whenever a specified reference interest rate, such as a compounded overnight reference rate, falls below an agreed level, the strike.
