Difference between FRAs, Interest Rate Swaps, Caps, Puts, receiver swapation and payer swapation

Hi everyone,

Looking to see if someone could help clarify the differences between all these concepts for me with definitions. I wrote a mock where it had all of them in one question and realized that I don’t understand the differences. I read through my textbooks and I’m still confused.

Any help would be greatly appreciated!

Here you go:

  • An FRA is, essentially, an agreement to enter into two loans in the future: one long, one short, one fixed, one floating, each with a single payment at the end. However, the FRA is settled at the beginning of the loan period (in advance, for the present value of the difference in the interest payments), not at the end (in arrears).
  • An interest rate swap is the exchange of interest rate payments for one or more periods; one payment is fixed, the other is floating. Swaps are settled at the end of the period (in arrears) with the payments netted.
  • A cap is a series of interest rate calls: options on interest rates that pay the difference between a floating rate and the (fixed) strike rate. Like interest rate swaps, they’re settled in arrears. Each of the individual calls is known as a caplet.
  • A put is an option to sell an underlying asset at a given price on (or before) a given date. However, I suspect that you meant to ask about _ floors _. A floor is a series of interest rate puts: options on interest rates that pay the difference between the (fixed) strike rate and a floating rate. Like interest rate swaps, they’re settled in arrears. Each of the individual putss is known as a floorlet.
  • A receiver swaption is an option to enter into a plain vanilla interest rate swap as the fixed rate receiver (floating rate payer), at a fixed rate established at the time the swaption is purchased.
  • A payer swaption is an option to enter into a plain vanilla interest rate swap as the fixed rate payer (floating rate receiverer), at a fixed rate established at the time the swaption is purchased.