Looking at my notes and the payoff for a caplet is (one year rate - Cap rate) x notional ------------------------------------------ 1 + Rf You discount it to the PV cos the payoff occurs one period after expiration. Now a two year cap is = value of 1 year caplet + value of 2 year caplet. Fine. Looking at the payoff for a CAP two chapters later it says the payoff is equal to (Index rate - cap rate) x (actual days / 360) Why this disparaty?
can you point to this in the materials?
Schweser P72-74 then P128.
One seems to be LIBOR interest rate, Pg128 , while the other is generally talking about interest rates ( use exact calculation )
one is the payoff you get when it is settled, the other is its theoretical value to you, very subtle difference. You only need to be able to calculate the payoff though. Most rate stuff will always pay in arrears, ie rate will fix in at the start of the period and cashflow occurs at the end
kurupt1 Wrote: ------------------------------------------------------- > one is the payoff you get when it is settled, the > other is its theoretical value to you, very subtle > difference. > > You only need to be able to calculate the payoff > though. > > Most rate stuff will always pay in arrears, ie > rate will fix in at the start of the period and > cashflow occurs at the end Well both equations give you the payoff at expiry. I’m struggling to understand the difference here? Any help??
no, one is the physical cash payoff and one is the pv of it