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Hedging Floating Rate Debt.. Why are Caps used so much less than Swaps?

Sponsored By DAG - Derivatives Advisory Group

Topics:: Banking & Capital Markets > Debt/Bonds; Finance & Risk Management > Hedging

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Abstract:: For more than twenty years, any borrower who used caps to hedge their floating rate interest risk would have had a much lower cost than by using swaps. Yet surprisingly, most borrowers choose caps much less frequently than swaps as a hedge. Why?

Borrowers choose swaps over caps because banks prefer to sell swaps. Banks make more money from selling swaps than they do from selling caps. A cap often makes more sense than a swap, and a borrower needs to know when and why.

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Released: June 17, 2011

Length: 3 pages

Format: PDF (152 kb)

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