Interest Rate Call Option

AAA

DEFINITION of 'Interest Rate Call Option'

An interest rate derivative in which the holder has the right to receive an interest payment based on a variable interest rate, and then subsequently pays an interest payment based on a fixed interest rate. If the option is exercised, the investor who sells the interest rate call option will make a net payment to the option holder.

INVESTOPEDIA EXPLAINS 'Interest Rate Call Option'

Interest rate call options can be used by an investor wishing to hedge a position in a loan in which interest is paid based on a floating interest rate. By purchasing the interest rate call option, an investor is able to forecast the cash flow that will be paid when the interest payment is due.

Interest rate call options can be used in either a periodic or balloon payment situation.

RELATED TERMS
  1. Balloon Maturity

    1. A repayment schedule for a bond issue where a large number ...
  2. Derivative

    A security whose price is dependent upon or derived from one ...
  3. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  4. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
  5. Balloon Loan

    A type of loan which does not fully amortize over its term. Since ...
  6. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
RELATED FAQS
  1. To what extent are utility stocks affected by changes in interest rates?

    Utility stocks are definitely subject to interest rate risk and can be significantly impacted by changes in interest rates. Competition ... Read Full Answer >>
  2. What is the difference between term structure and a yield curve?

    There is no difference between term structure and a yield curve; the yield curve is simply another name to describe the term ... Read Full Answer >>
  3. Why is term structure theory of importance to economists?

    The term structure theory, also known as the term structure of interest rates, is important to economists because it lets ... Read Full Answer >>
  4. What is the difference between derivatives and options?

    Options are one category of derivatives. Other types of derivatives include futures contracts, swaps and forward contracts. ... Read Full Answer >>
  5. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  6. Where can I find year-to-date (YTD) returns for benchmarks?

    Benchmarks are securities or groups of securities against which investment performance is analyzed. Examples of popular equity ... Read Full Answer >>
Related Articles
  1. Options & Futures

    Reducing Risk With Options

    If you want to use leverage to your advantage, you must know how many contracts to buy.
  2. Options & Futures

    Options Basics Tutorial

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

    Understanding Option Pricing

    Take advantage of stock movements by getting to know these derivatives.
  4. Options & Futures

    The 4 Advantages of Options

    Flexible and cost efficient, options are more popular than ever. Find out why.
  5. Options & Futures

    Stock Options To Trade On Intraday Momentum Index

    The intraday momentum index, or the IMI, can offer a reliable way to profit on options, but only for the right stocks.
  6. Trading Systems & Software

    The Fast-Paced World of Libor & Fixed Income Arbitrage

    LIBOR is an essential part of implementing the swap spread arbitrage strategy for fixed income arbitrage. Here is a step-by-step explanation of how it works.
  7. Options & Futures

    Intro to NYSE Binary Return Derivatives

    The New York Stock Exchange is entering into binary options trading. Here’s a quick introduction to how NYSE Binary Return Derivatives (ByRDs) work.
  8. Savings

    Explaining Term Deposits

    A term deposit (more often called a certificate of deposit or CD) is a deposit account that is made for a specific period of time.
  9. Economics

    What's a Maturity Date?

    Maturity date is the final date when any remaining principal and any unpaid interest are due on a debt.
  10. Professionals

    Worried About Stocks? Try on Convertibles

    Convertibles are a good hedge against equity market risk (if you're o.k. with losing a bit of upside potential).

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!