In practice exam 1, morning session of exam 3, question 94 with regard to rate floor. It says: “The value of the 2-year floor is equal to the value of comparable 1-year put option plus the value of a comparable 2-year put option.” I understand that a 1-year interest rate floor is equal to a comparable 1-year put option, but why is the value of the 2-year floor is equal to what the answer says? thanks so much =)
2 year floor - you have a 1 year floorlet (which is a Put) + 2 year floorlet (another put). does that answer your question?
a floor is a series of put options expiring on dates coinciding with payments dates on the floor. if you are long a floor you will make money every time the underlying goes below the strike price. basically, think of it as a one put option with multiple exercises allowed!! or in other words, a series of put options (european) similarly a cap is a series of call options.
this helps… thanks much guys =)