Capital Markets Examiner School, Providence, RI

Caps/Floors

 Cap (or floor): an option that is paid for upfront  and pays a floating amount if the interest rate  rises (falls) above (below) the strike rate  A cap or a floor can be viewed as a form of  insurance policy

Hedge Designation

 A balance sheet hedge must have a formal designation of the type of hedge included in documentation.

 Two types: Cash Flow Hedge or Fair Value Hedge

 Along with the designation, documentation should include a narrative of the balance sheet hedging strategy that is formally presented to ALCO and the Board.