Cap and Floor Instruments

Cap and floor instruments are financial tools used to manage interest rate risk. A cap sets a maximum interest rate a borrower will pay, protecting against rates rising above a certain level. Conversely, a floor secures a minimum interest rate, ensuring the lender receives a baseline return if rates fall below that point. These instruments help both parties manage uncertainty around fluctuating interest rates, providing predictability and control over borrowing costs and income, especially in variable rate loans or investments.