Our Cap and Floor Pricing model has the capability to price SOFR hedges out to 7 years and up to a 7.00% strike. Meant for discussion purposes (please call or email us for a more precise quote!), this resource is great for quickly ballparking various scenarios, along with the ability to analyze the anticipated protection (projected payout) and month-by-month cost breakdown.
An Interest Rate Cap is a series of options contracts on SOFR that hedge floating rate payers against a rise in interest rates. Borrowers can use these contracts as a way to limit their risk to rising interest rates.
Cap and Floor Pricing is driven primarily by two factors: 1) Interest Rate Expectations, and 2) Implied Volatility. Interest Rate Expectations are easy to track. If front-end swap rates (see our home page) move higher:
Volatility is the measure of confidence, or lack thereof, that traders have in current rate expectations. The higher volatility is, the greater the range of expected outcomes, the more a trader will charge.
You can browse our Resource Library for more information on how caps and floors work. If you’re new to these hedges, we recommend starting with:
Caps |
Floors |
Our Team can answer any questions you may have, as well as help provide guidance when structuring a cap. You can contact us at CapTeam@pensford.com, or call us at (704) 887-9880.