CAPS, FLOORS AND COLLARS Definition

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CAPS, FLOORS AND COLLARS: CAP is a series of European interest rate call options used to protect against rate moves above a set strike level; FLOOR a series of European interest rate put options used to protect against rate moves below a set strike level; and, COLLAR is the simultaneous purchase of an interest rate cap and sale of an interest rate floor on the same index for the same maturity and notional principal amount.

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EXERCISE, in business or law, to make use of a right available in a legally binding agreement, e.g. to implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security.

STOCK INDEX a formalized screened listing of traded securities, e.g. the Dow Jones Industrial Average that tracks a portfolio of stocks.

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