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Is ALM Able to Generate Cashflow Based on Modeling Caplets and Floorlets Derivatives? (Doc ID 2707457.1)

Last updated on SEPTEMBER 15, 2020

Applies to:

Oracle Financial Services Asset Liability Management - Version 8.0.0 and later
Information in this document applies to any platform.
Oracle Financial Services Asset Liability Management (ALM)
Oracle Financial Services Analytical Applications (OFSAA)
Oracle Financial Services Enterprise Performance Management (EPM)


Is ALM able to generate cashflow based on modeling caplets and floorlets derivatives as illustrated in below URL:

"How a Caplet Works
Caplets are usually based on an interbank interest rate such as LIBOR. That's because they are typically used for hedging the risk of LIBOR rising. For example, if a company issues a bond with a variable rate of interest to take advantage of a short-term drop in rates, they run the risk of greater payouts if interest rates begin to increase and continue to do so. At this point they would be paying out more on the loan (bond) interest payments than they had hoped. If interest rates rose rapidly it could spell disaster for them. Buying an option to cap the interest rate they have to pay would protect them from this disaster.

In this scenario, the option buyer may opt for a longer term (one or more years) of protection. To accomplish this an option buyer may combine several caplets in a series to create a "cap" so as to manage longer-term liabilities. (The term caplet implies a shorter duration of the cap. A caplet's duration is usually only 90 days).

If a trader buys a caplet they would be paid if LIBOR rose above their strike price; they would receive nothing if LIBOR fell below their strike price, so it acts as an insurance against rising rages. Traders time a caplet's expiration to coincide with a future interest rate payment."


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