Globally-Capped Contract

DEFINITION of 'Globally-Capped Contract '

A type of option that guarantees a minimum return but puts a cap on profits. A globally-capped contract differs from a locally-capped contract in that the cap is on the life of the contract rather than quarterly or other intermediate returns. Globally-capped contracts have become very popular amongst investors that are interested in structured investment products that are less volatile than straight options.

BREAKING DOWN 'Globally-Capped Contract '

Although both globally-capped and locally-capped contracts are very popular, many academics have questioned why the latter are more in demand than the former. According to Standard Finance Theory, the simpler globally-capped contracts should be preferred to more complex path-dependent contracts like those that are locally capped. The reason they are not, some academics contend, is due to unrealistic expectations. Others believe that sellers of retail financial products deliberately design them to be complex, in order to confuse consumers.

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