“As a technical note, caps and floors are usually paid in arrears, meaning that, for example, the $75,000 payoff to the floor for the first quarter will be made three months later, at then end of the second quarter” Do I read it properly: “the end of the *second* quarter”? So, for Q1, Libor =7.7%, my floor rate is 8% and I get paid at the end of the *second* quarter? Who could confirm?
isnt it why you PV the payoff ? i guess this is different from FRAs where the payment is due at expiration of the FRA though it represents the savings on the loan for which interest will only be paid at the end of the loan.
I’ve never seen an example or an exercice where you PV the payoff of a cap or a floor… With the FRA, you discount the payment and you pay immediately. With a cap / floor, the parties know what they have to pay / receive at the end of the quarter. The writer or the cap / floor has just paid the variable interest but the seller waits till the end of the following quarter the reimburse or take the difference. And there is no FV calculation… I find it very strange but if you tell me that’s the way it works, I believe you!