interest rate call option


An exotic financial derivative instrument that helps the holder hedge the risk of incurring losses due to an increase in the interest rate. The option allows the holder to pay an amount based on a fixed rate of interest specified in the option but receive a larger payment based on the higher prevailing rate of interest. This could be used by a person who has taken a loan on a floating rate of interest to limit the highest rate of interest for which payments would have to be made, while enjoying lower rates of interest.
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interest rate buy down plans interest rate cap