Filter by Categories
Accounting
Banking

Derivatives




Chooser Floor


An interest rate floor (particularly, a flexible floor) that gives the holder the right to choose a specific number of floorlets to exercise, from amongst a broader set, over the life of the floor. On each reset date, the holder will decide whether to exercise the floorlet or not, depending on the level of 3-month LIBOR. The holder can go on exercising floorlets on reset dates for the number of times it would be permissible to exercise under the contract.

An example is a 50% chooser floor on 3-month LIBOR in which the floor rate is 3% and the maturity is 4 years. The holder has the right to exercise 50% of the floorlets, i.e., any 8 of the 16 caplets that form the regular floor (vanilla floor). The holder will wait until reset dates to see whether a given floorlet is worth exercising or not. Once the holder has exercised any 10 floorlets (not necessarily in a row), the contract will expire, regardless of the stated maturity.



ABC
Derivatives have increasingly become very important tools in finance over the last three decades. Many different types of derivatives are now traded actively on ...
Watch on Youtube
Remember to read our privacy policy before submission of your comments or any suggestions. Please keep comments relevant, respectful, and as much concise as possible. By commenting you are required to follow our community guidelines.

Comments


    Leave Your Comment

    Your email address will not be published.*