Interest Rate Cap Floor

An Interest Rate Cap and Floor are financial instruments used to manage interest rate risk in loans or investments. A cap sets an upper limit on the interest rate, ensuring that the borrower does not pay more than the capped rate, even if market rates rise. Conversely, a floor sets a lower limit, guaranteeing that the lender or investor earns at least the minimum rate, even if market rates fall. These tools are often used in floating-rate loans or interest rate swaps to provide predictability and protect against adverse rate fluctuations. Caps and floors can also be combined to create a collar, where the rate fluctuates within a defined range.