Explain about interest rate management, Financial Management

Assignment Help:

Interest rate caps as well as collars are available on the over the counter (OTC) market or may be devised using market based interest rate options. They may be utilize to hedge current or expected interest receipts or payments. An interest cap places an upper edge on the interest rate to be paid and is useful to a potential borrower of funds at a future date. The borrower by purchasing a cap will restrict the interest paid to the agreed cap strike price (less any premium paid). OTC caps are obtainable for periods of up to 10 years and can thus protect against long-term interest rate movements. As with all alternatives if interest rates were to move in a favourable direction the buyer of the cap could let the option lapse and take advantage of the more favourable rates in the spot market.

The major disadvantage of options is the premium cost. A collar option decreases the premium cost by limiting the possible benefits of favourable movements. It engages the simultaneous purchase and sale of options or in the case of OTC collars the equivalent net premium to this. The premium paid for the buying of the alternative would be partly or wholly offset by the premium received from the sale of options. Where it is completely offset a zero cost collar exists.


Related Discussions:- Explain about interest rate management

What is share exchange, What is Share exchange    Predator company off...

What is Share exchange    Predator company offers their shares in exchange for target company's shares. So target shareholders become part of predator shareholders and so have

Financial Analysis of a company, You are required to choose a company for a...

You are required to choose a company for analysis. This company should be quoted on one of the principal international exchanges. It may be your own company. You should then do the

Why does money have time value, Why does money have time value? Positiv...

Why does money have time value? Positive interest rates point toward that money has time value.  When one person lets one more borrow money, the first person needs compensation

Agency relationships, conflicts between shareholders and government in agen...

conflicts between shareholders and government in agency relationship

What is the role of a broker in security transactions, What is the role of ...

What is the role of a broker in security transactions? How are brokers compensated? Brokers manage orders to sell or buy securities. Brokers are agents who deal on behalf of an

Define the covered arbitrage process and arbitrage profit, Assume that the ...

Assume that the current spot exchange rate is FF6.25/$ and the 3 month forward exchange rate is FF6.28/$. The 3 month interest rate is 5.6% per year in the U.S. and 8.8% per year i

Credit markets, Credit Markets: The financial system enables supply of ...

Credit Markets: The financial system enables supply of funds to support purchase of goods and services and to finance capital investments. In this way, it provides funds both t

Explain about money markets by maturity of the securities, Explain about mo...

Explain about money markets by maturity of the securities. On the basis of the maturity of the securities traded, money markets can be introduced here: Money markets are financ

Explain the working of insurance companies, Insurance companies The pri...

Insurance companies The primary purpose of insurance companies is to protect individuals and firms known as policy-holders from adverse events. Insurance companies receive prem

Compare diversifiable and nondiversifiable risk, Compare diversifiable and ...

Compare diversifiable and nondiversifiable risk. Which do you believe is more significant to financial managers in business firms? Actually Diversifiable risk can be dealt with b

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd