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.

BREAKING DOWN '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. Interest Rate Options

    An investment tool whose payoff depends on the future level of ...
  2. Interest-Rate Derivative

    A financial instrument based on an underlying financial security ...
  3. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  4. Call On A Call

    A type of compound option in which the investor has the right ...
  5. American Option

    An option that can be exercised anytime during its life. American ...
  6. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
Related Articles
  1. Trading

    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.
  2. Managing Wealth

    Managing Interest Rate Risk

    Learn which tools you need to manage the risk that comes with changing rates.
  3. 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.
  4. Trading

    Managing Interest Rate Risk

    Interest rate risk stems from the possibility that an interest-bearing asset’s value will change due to changing interest rates.
  5. Trading

    Dividends, Interest Rates And Their Effect On Stock Options

    Learn how analyzing these variables are crucial to knowing when to exercise early.
  6. Trading

    Three Ways to Profit Using Call Options

    A brief overview of how to provide from using call options in your portfolio.
  7. Trading

    4 Reasons To Hold Onto An Option

    There are times when an investor shouldn't exercise an option. Find out when to hold and when to fold.
  8. Trading

    Exploring The World Of Exotic Options

    Exotic options provide investors with new alternatives to manage their portfolio risks and speculate on various market opportunities. The pricing for such instruments is considerably complex, ...
RELATED FAQS
  1. What does high open interest tell you about an option?

    Learn about the open interest of options contracts and what a high and a low open interest indicate about the liquidity of ... Read Answer >>
  2. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  3. What is the difference between open interest and volume?

    Learn more about options, what options' volume and open interest are and the difference between volume and open interest ... Read Answer >>
  4. How can derivatives be used to earn income?

    Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>
  5. What does it mean to be long or short a derivative?

    Find out more about derivative securities and what it indicates when traders or investors establish a long or short position ... Read Answer >>
  6. How can an investor reduce interest rate risk?

    Learn about the different ways investors can reduce interest rate risk. Locking in interest rates increases certainty for ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center