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.
Next Up
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

Interest Rate Options
An investment tool whose payoff depends on the future level of ... 
InterestRate Derivative
A financial instrument based on an underlying financial security ... 
Variable Interest Rate
An interest rate on a loan or security that fluctuates over time, ... 
Call On A Call
A type of compound option in which the investor has the right ... 
American Option
An option that can be exercised anytime during its life. American ... 
Fixed Interest Rate
An interest rate on a liability, such as a loan or mortgage, ...
Related Articles

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. 
Managing Wealth
Managing Interest Rate Risk
Learn which tools you need to manage the risk that comes with changing rates. 
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. 
Trading
Managing Interest Rate Risk
Interest rate risk stems from the possibility that an interestbearing assetâs value will change due to changing interest rates. 
Trading
Dividends, Interest Rates And Their Effect On Stock Options
Learn how analyzing these variables are crucial to knowing when to exercise early. 
Trading
Three Ways to Profit Using Call Options
A brief overview of how to provide from using call options in your portfolio. 
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. 
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

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 >> 
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 >> 
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 >> 
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 >> 
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 >> 
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 >>