Fraption

DEFINITION of 'Fraption'

A type of option that gives the option holder the opportunity to enter into a forward rate agreement at a specific strike price during a predetermined amount of time. Buyers use fraptions to protect against falls in interest rates at the cost of a slight premium.

Also known as an "interest rate guarantee".

BREAKING DOWN 'Fraption'

For example, suppose that an investor will have a deposit of $100,000 for a one-year period starting in one year. Because the investor wants a return of 10%, he or she buys a fraption for 10%. If the interest rates fall to 5% during the one-year period and the investor exercises the fraption, the fraption writer will pay out the other 5% in order to give the investor a total return of 10%

RELATED TERMS
  1. Option

    A financial derivative that represents a contract sold by one ...
  2. Stock Option

    A privilege, sold by one party to another, that gives the buyer ...
  3. Floortion

    A type of option that gives the holder the right, but not the ...
  4. Interest Rate Call Option

    An interest rate derivative in which the holder has the right ...
  5. Premium Income

    1. In investing, income that is earned through the sale of an ...
  6. Average Strike Option

    A type of Asian option in which the strike price is based on ...
Related Articles
  1. Trading

    Options Hazards That Can Bruise Your Portfolio

    Learn the top three risks and how they can affect you on either side of an options trade.
  2. Trading

    When Should I Sell A Put Option Vs A Call Option?

    Beginning traders often ask not when they should buy options, but rather, when they should sell them.
  3. Investing

    Income Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  4. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  5. Trading

    What's the Strike Price?

    The strike price is the price at which a derivative can be exercised, and refers to the price of the derivative’s underlying asset. In a call option, the strike price is the price at which the ...
  6. Trading

    The Basics of Options Profitability

    The adage "know thyself"--and thy risk tolerance, thy underlying, and thy markets--applies to options trading if you want it to do it profitably.
  7. Markets

    How to Trade Options on Government Bonds

    A look at trading options on debt instruments, like U.S. Treasury bonds and other government securities.
  8. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  9. Trading

    Trading Forex Options: Process And Strategy

    What are the processes to trade forex options on most liquid currency pairs, and what are some strategies for success?
  10. Trading

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
RELATED FAQS
  1. What is the difference between "right" and "obligation" on a call option?

    Learn what a call option is, what determines a buyer and seller of an option, and what the difference between a right and ... Read Answer >>
  2. How do I set a strike price for an option?

    Learn about the strike price of an option and how to set a strike price for call and put options depending on risk tolerance ... Read Answer >>
  3. How do I change my strike price once the trade has been placed already?

    Learn how the strike prices for call and put options work, and understand how different types of options can be exercised ... Read Answer >>
  4. How do I set a strike price in a put?

    Learn about put options, considerations to make before you select strike prices and how to select strike prices for your ... Read Answer >>
  5. How do speculators profit from options?

    As a quick summary, options are financial derivatives that give their holders the right to buy or sell a specific asset by ... Read Answer >>
  6. When is a put option considered to be "in the money"?

    Learn about put options, what they are, how these financial derivatives operate and when put options are considered to be ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center