Capitalising with caps
Background
While spread options have allowed clients to pay very low coupons, a low volatility environment remains a threat. Besides, the lack of cap prevents some of them from investing in such strategies.
Spread option swaps are linked to a currency spread. The most popular one is EUR/USD versus EUR/CHF. In most cases, the client:
• receives a fixed or a variable vanilla coupon
• pays: Max[0; EUR/USDFINAL – EUR/CHFFINAL]
The original idea was to allow the client to sell expensive options, with
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