Afterlife

Some of those guys came in late last night therefore we started late around 10pm ended around 12am. As usual we went to kill the second boss in tempest keep (Void Reaver) . Damn I need to respect my warrior talent to protection ,ooh well they gear me up I have to pay them back. We manage to down him in 3 tries. I guess it was autumn festival people still in celebration mood instead of getting real in the game.

An interest rate cap is a derivative
in which the buyer receives money at the end of each period in which an
interest rate exceeds the agreed strike price.
An example of a cap would be an agreement to receive money for each month the LIBOR rate exceeds 2.5%.

The interest
rate cap can be analyzed as a series of European call
options or caplets
which exists for each period the cap agreement is in existence.

In formulas a
caplet payoff on a rate L struck
at K is

where N is the
notional value exchanged and α is the day count fraction corresponding to the period to which
L applies.

For example
suppose you own the following caplet

· 6 month USD LIBOR rate

· Expiry of 1st February 2007

· Struck at 2.5%

· Notional of 1 million dollars.

Then if the USD
LIBOR rate sets at 3% on 1st February you receive 1m*0.5*max(0.03-0.025,0) =
$2500. Customarily the payment is made at the end of the rate period, in this
case on 1st August.

Basically, this theory behind is a risk product uses the formula will result in protection in rising interest rate. Hmmm does it mean that my current housing loan using Interest Rate Cap/Floor ?