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cap/floor straddle
Hi,What is a cap/floor straddle in relation to interest rates ? i.e. a 5 Year cap.floor straddle priced at 20% for GBP rates. Thanks.
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- Martinghoul
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cap/floor straddle
Your statement doesn't make a lot of sense... What's the strike? I am a seller at 20%, regardless...
cap/floor straddle
You pay someone money up-front or over time in order to earn the difference between some spot interest rate and a strike rate, whether that difference is positive or negative. I can't think of a natural use for this, it would probably be a speculative bet that interest rates will move a lot in one direction or the other, in other words, that the market has underestimated interest rate volatility.
cap/floor straddle
yes, an at-the-money cap/floor straddle is a volatility trade, 20% being the volatility to be used in the Black formula to obtain the price.A "speculative bet" ? Oh, well... this anti-derivative sentiment is really ramping up...ciao -- Nando
Last edited by ametrano on February 15th, 2009, 11:00 pm, edited 1 time in total.