An interest rate floor 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 floors can provide investors with protection against interest rate decreases suffered by arrears swaps. Furthermore, investors facing a market with flat rates and expecting decreases of higher proportions than what is predicted by a corresponding yield curve may find arrears floors particularly instrumental. Like a standard interest rate floor, which is made up of a series of floorlet, an arrears floor can also be viewed as a bunch of arrears floorlets.
August 10, 2024
