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Prof. Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.

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Cap (also used in German; more rarely Deckel[ung])

Generally, the contractual agreement of an upper interest rate limit for the use of capital. If the interest rate exceeds this cap, the interest rate remains at this limit (an option-like contract for which the buyer pays a fee or premium, to obtain protection against a rise in a particular interest rate above a certain level). In this way, the issuer can hedge against the risk of an unexpected rise in market interest rates. – Interest cap on a floating-rate note (the upper limit on the interest rate on a floating-rate note). – In the case of certificates, the fixed maximum amount up to which the investor can profit from an increase in the price of the underlying asset (the reference base). – Forward interest-rate agreements, which are traded as a separate right. The buyer of a cap is willing to pay a premium for – the seller to pay him the difference between an agreed interest rate and – a – more closely described, such as: LIBOR) – market interest rate, – as soon as the market interest rate exceeds the agreed interest rate. This allows the buyer of the option to hedge against interest rate increases. In this way, his variable-rate obligations become fixed-rate when the agreed interest rate, the so-called cap rate, is reached. – The seller of the cap receives a premium, the so-called cap premium, for the interest rate compensation agreement. If the market interest rate exceeds the cap rate, he has a payment obligation (he buyer of a cap agreement pays a fee to the seller. In return, the seller will pay the buyer if a designated floating index rate is higher than a specified fixed rate on designated days. The seller pays nothing if the floating rate is below the fixed rate. – Buyers of cap agreements use them to hedge against rising interest rates, because payments to the buyer increase as rates rise). – A separate segment has emerged on the financial market for caps. – See bond, floating rate, chooser cap, contingent swap, floor, inflation options, limit, option, collateral lock, speculation, stop order, certificate, interest rate derivatives, interest rate option, interest rate swap.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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