Fairmat Example

Standard Floor: Floor Knock-Out

Tags: Floors

An Interest Rate Floor is (generally) an O.T.C. derivative contract based on a series of European interest rate put options. This interest rate sensitive instrument protects the floor buyer from losses resulting from a decrease in interest rates. The floor seller compensates the buyer with a payoff when the reference interest rate falls below the floor strike rate. An Interest Rate Floor written on a short-term interbank rate (e.g. EUR Euribor 6 Months) with a knock-out option. In detail a knock-out option under a trigger clause is an option contract in which the option holder receives an option conditional on the underlying rate breaching a certain trigger level (also called barrier level).