W
wall_e
Member
In chapter 12 under interest rate caps it says that the caps can be seen as a series of call options. Later on in the chapter (pg. 15) it says that the interest rate caps can be seen as a put option. I'm not understanding why that is the case.
I can see how it can be a series of call options. L*delta*max(Rk-Rx). if Rk is greater than Rx, then there is a payoff otherwise there isn't a payoff. But I can't see how a cap can be a put option when describing as layoffs on zero coupon bonds.
An explanation would be much appreciated.
Thanks
I can see how it can be a series of call options. L*delta*max(Rk-Rx). if Rk is greater than Rx, then there is a payoff otherwise there isn't a payoff. But I can't see how a cap can be a put option when describing as layoffs on zero coupon bonds.
An explanation would be much appreciated.
Thanks