15. Cap, Floor & Collars

Frugal Finance offers online courses covering various aspects of finance. One section introduces caps, floors, and collars, which are combinations of calls and puts on SOFR used to control interest rate risk. By considering a single future period for a loan, students understand how to constrain the cost of the loan with calls or puts on SOFR, following the logic of forward put-call parity.

Caplet

The Caplet course leaps into advanced finance procedures, including managing interest rate risk and implementing financial derivatives tactics. Students look at topics like forward rate agreements (FRAs), SOFR, interest rate caps, and caplets using real-world examples and tutorials in Excel, improving their competence in financial analysis.

Floorlet

Floorlet lessons cover tools for establishing a lower bound on interest costs, focusing on puts on SOFR sold with floating rate loans to protect against interest rates dropping below a certain level. Differences between single period floorlets and multiple period interest rate floors are explained, with examples illustrating effective interest rate calculations and use of the Black Model for accurate valuation.

Collar

Collar tactics for managing loan rates are discussed, using call and put options to set upper and lower bounds on loan costs and analyzing their impact on final interest rates. Various financing alternatives and their effects on loan rates are explored, aiding students in making informed decisions in loan portfolio management.

The Black Model and Option on SOFR course looks at forward SOFR rates, volatility measures, and option valuation procedures. Students understand the use of the Black Model to options on SOFR, including calculations of d1 and d2 values and the importance of zero-coupon factors in option valuation, allowing them to analyze and value options on SOFR effectively.

Applying the Black Model to Option on SOFR offers an all-inclusive Excel finance course tailored for college students, financial analysts, managers, commodity traders, consultants, and stock brokers. Topics include call and put options, historical standard deviation, yield curves, forward rates, and option valuation equations, allowing students to confidently analyze and value options on SOFR in today’s financial landscape.