Caplet

A single call on an interest rate, paying notional × accrual fraction × any excess of the reference rate over the cap rate, one period after the rate is set. An interest rate cap is a series of them.

Where you will meet it

Caplet appears in 2 learning outcomes on the CFA syllabus. A few of them:

• Use a two-period binomial model to value an interest rate option and explain the result
  CFA Level II · Derivatives and Risk Management

  “The underlying is a rate, so a call (like a caplet, but paid when the rate is set) pays notional × max(0, rate − strike) and a put (like a floorlet) pays notional × max(0, strike − rate), adjusted for the accrual period.”

• Explain how the Black model values European swaptions and European interest rate options
  CFA Level II · Derivatives and Risk Management

  “A caplet, a call on a future reference rate, is worth c = notional × accrual fraction × discount factor to the payment date × [FRA × N(d1) − X × N(d2)], paid one period after the rate is set.”

See also

Accrual fraction · Capitalisation rate · Reference rate

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with C · Glossary