OTC interest rate options - part 2

In this lesson

1. 0:01 Understanding interest rate collars
2. 1:04 Calculating net interest at 1% rates
3. 3:04 Working through 3% scenario
4. 4:17 Analysing 10% interest rate scenario
5. 5:24 How collars protect across rate ranges
6. 8:04 Recap: caps, floors and collars

About this lesson

exceed and a minimum you'll never fall below. Through worked examples with different interest rate scenarios, you'll see exactly how collars function in practice. When rates fall below your floor, losses on the call option offset your savings. When rates stay between your floor and cap, you simply pay the market rate. When rates rise above your cap, gains on the put option prevent you paying more than your maximum. This technique is essential for understanding OTC interest rate options in your FM, AFM, or F3 studies. By working through the calculations yourself—testing 1%, 3%, and 10% rate scenarios—you'll build confidence in applying collars to real borrowing situations. This is practical knowledge you'll use in case studies and exams when advising on hedging strategies and interest rate risk management.

Duration: 9m