Caps & Floors

Interest Rate Caps

A cap contract is a derivative product that we offer to customers who, owing to their market expectations and/or to the nature of their business, prefer variable (rather than fixed) interest rate borrowing but who want to be sure that their interest rate risk exposure does not exceed a particular level.

A cap contract is essentially a so-called “European type option”, which is to say an option to buy or sell underlying at a certain date in the future for a predetermined price. The parties to a cap contract set an upper limit (in other words the “cap”) beyond which interest rates must not go during the lifetime of the underlying debt. In the case of caps, that rate corresponds to the strike price of an option contract.

By purchasing a cap contract, a borrower has the ability to borrow at a variable rather than a fixed interest rate while also protecting himself against excessive rises in interest rates. It also gives him certain advantages should interest rates fall.

Interest Rate Floors

A floor contract is a derivative product in which we commit ourselves to paying the positive difference between the amount of interest receivable on a variable-rate instrument and a specified minimum rate (the floor).

The simultaneous purchase of an interest rate cap and sale of an interest rate floor position is referred to as an “interest rate collar”.

For detailed information about the tax consequences of caps & floors trading in Türkiye please click here.

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