An interest rate cap whereby the buyer of the cap pays no up-front premium. Instead, he agrees to pay a prespecified premium if the cap is in the money on its expiration date. This contingency means two things. First, the premium will be paid only at expiration if the above condition is met. Second, and due to the first, the premium on this cap would be greater in value than the premium on an ordinary cap (vanilla cap).
December 16, 2024
