Chapter 18 Interest Rate Risk

Oakham buys an interest rate cap set at Libor of 8.5 per cent. Assume that this costs 2.3 per cent of the principal amount, or £20m × 0.023 = £460,000 payable immediately to the cap seller. So if for the whole of the third year Libor rose to 9.5 per cent Oakham would pay interest at 9.5 per cent plus 1.5 per cent to bank A but would also ... ................
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