What is CAP, FLOOR & Collor

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What is CAP, FLOOR & Collor

What is CAP, FLOOR & Collor Common points for all three:
• These are Over the Counter type of Option derivatives.
• These are useful for those who borrow or lend on Floating rate of Interest.
I.WHAT is Cap:
• Useful for those who borrow money.
Cap Pay Commision/ Premium Cap
Seller Undertaking that he will compensate his loss Buyer
on account of increase in Interest Rate

What is CAP, FLOOR & Collor

In Simple word, Cap Buyer fixes a maximum rate for himself i.e. he limits his loss
not gains. Gains are not shared with cap seller.
II.What is Floor:
• Useful for those who lend money.
Floor Pay Commision/ Premium Floor
Seller Undertaking that he will compensate his loss Buyer
on account of decrease in Interest Rate

In Simple word, Floor Buyer fixes a minimum rate for himself i.e. he limits his loss
not gains. Gains are not shared with floor seller.

III. What is Collor:
• It is a combination of Cap and Floor.
• In this, no commission is paid to any body.
• Profit/ Loss of Collor buyer is limited i.e. he will not be gaining or
loosing excessively on account of change in Interest Rate.
Collor Share of Profit, if he gains Collor
Seller Compensate the loss, if he looses Buyer
• Collor can be taken by anybody whether borrower or lender.

i. If Taken by borrower (Collor Buyer):
• If interest rates goes up then his loss will be compensated by color
seller.
• If Interest rates goes down then collor buyer will share the profit.
ii. If Taken by lender (Collor Buyer):
• If interest rates goes up then collor buyer will share amount of profit
with collor seller.
• If interest rates goes down then the loss to collor buyer will be
compensated by collor seller.

Hope our article What is CAP, FLOOR & Collor will help you !!!

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