An interest rate cap that has its rates reset in arrears and likewise paid in arrears. However, in practice, a lag of two business days between the reset and the payment is commonly observed. Arrears caps can provide investors with protection against interest rate increases suffered by arrears swaps. Furthermore, investors facing a market with flat rates and expecting rises of higher proportions than what is predicted by a corresponding yield curve may find arrears caps particularly instrumental. Like a standard interest rate cap, which is made up of a series of caplets, an arrears cap can also be viewed as a bunch of arrears caplets.
August 10, 2024
