Fraption

AAA

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".

INVESTOPEDIA EXPLAINS '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. Forward Contract

    A customized contract between two parties to buy or sell an asset ...
  2. Forward Rate Agreement - FRA

    An over-the-counter contract between parties that determines ...
  3. Call

    1. The period of time between the opening and closing of some ...
  4. Option

    A financial derivative that represents a contract sold by one ...
  5. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  6. Forward Market

    An over-the-counter marketplace that sets the price of a financial ...
RELATED FAQS
  1. What kinds of derivatives are types of forward commitments?

    A derivative is a type of security in which the price of the security is dependent on underlying assets. A derivative could ... Read Full Answer >>
  2. What does it mean to be long or short a derivative?

    A derivative is a type of security in which the price of the security is dependent on one or more underlying assets. A derivative ... Read Full Answer >>
  3. What is an over-the-counter derivative?

    A derivative is a type of security in which the price of the security depends on the price of the underlying asset. Depending ... Read Full Answer >>
  4. What does the underlying of a derivative refer to?

    A derivative security is a financial instrument in which the price of the derivative is dependent on its underlying asset. ... Read Full Answer >>
  5. What kinds of derivatives are types of contingent claims?

    A contingent claim is another term for a derivative with a payout that is dependent on the realization of some uncertain ... Read Full Answer >>
  6. How can an investor terminate a derivative contract?

    Most derivatives contracts have provisions allowing for early termination and netting out the initial investment. The early ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.
  2. Options & Futures

    Options On Futures: A World Of Potential Profit

    There's one simple hurdle in the transition from stock to futures options: learning about product specifications.
  3. Options & Futures

    The 4 Advantages of Options

    Flexible and cost efficient, options are more popular than ever. Find out why.
  4. Insurance

    Futures Fundamentals

    For those who are new to futures but want a solid understanding of them, this tutorial explains what futures contracts are, how they work and why investors use them.
  5. Investing Basics

    Understanding Non-Deliverable Forward (NDF)

    A foreign exchange hedging strategy where the parties agree to settle the profit or loss in a foreign currency futures contract before the expiration date.
  6. Investing

    What More Volatility Means For Momentum Stocks

    One byproduct of the recent tick higher in bond yields: a meaningful rise in volatility for both stocks and bonds.
  7. Options & Futures

    How & Why Interest Rates Affect Options

    The Fed is expected to change interest rates soon. We explain how a change in interest rates impacts option valuations.
  8. Investing Basics

    Explaining Currency Swaps

    A swap that involves the exchange of principal and interest in one currency for the same in another currency.
  9. Investing Basics

    Understanding Notional Value

    This term is commonly used in the options, futures and currency markets because a very small amount of invested money can control a large position.
  10. Options & Futures

    The Risks Of Writing Covered Calls

    While writing a covered call option is less risky than writing a naked call option, the strategy is not entirely riskfree.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center