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An interest rate cap is a derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed strike price. An example of a cap would be an agreement to receive a payment for each month the LIBOR rate exceeds 2.5%.
Capitalization rate (or "cap rate") is a real estate valuation measure used to compare different real estate investments. Although there are many variations, the cap rate is generally calculated as the ratio between the annual rental income produced by a real estate asset to its current market value .
For income-producing real estate, the NOI is the net income of the real estate (but not the business interest) plus any interest expense and non-cash items (e.g. -- depreciation) minus a reserve for replacement. The CAP rate may be determined in one of several ways, including market extraction, band-of-investments, or a built-up method.
The Black model (sometimes known as the Black-76 model) is a variant of the Black–Scholes option pricing model. Its primary applications are for pricing options on future contracts, bond options, interest rate cap and floors, and swaptions. It was first presented in a paper written by Fischer Black in 1976.
The LIBOR market model, also known as the BGM Model (Brace Gatarek Musiela Model, in reference to the names of some of the inventors) is a financial model of interest rates. [1] It is used for pricing interest rate derivatives, especially exotic derivatives like Bermudan swaptions, ratchet caps and floors, target redemption notes, autocaps ...
interest rate may adjust no more than 1% in a year; Mortgage payment adjustment caps: maximum mortgage payment adjustments, usually 7.5% annually on pay-option/negative amortization loans; Life of loan interest rate adjustment caps: total interest rate adjustment limited to 5% or 6% for the life of the loan.
The model is used mainly for the pricing of exotic interest rate derivatives such as American and Bermudan bond options and swaptions, once its parameters have been calibrated to the current term structure of interest rates and to the prices or implied volatilities of caps, floors or European swaptions.
John Hull and Alan White, "The pricing of options on interest rate caps and floors using the Hull–White model" in Advanced Strategies in Financial Risk Management, Chapter 4, pp. 59–67. John Hull and Alan White, "One factor interest rate models and the valuation of interest rate derivative securities," Journal of Financial and Quantitative ...