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Floor

• A floor is a put option on interest rates. If the interest rates fall below the floor rate, then the seller compensates the buyer for the difference in interest rates times a notational amount. If a bank has fixed rate liabilities and floating rate assets, floor can effectively convert the fixed rate liabilities into floating rate liabilities in a selling interest rate environment. Also see cap.
A series of options in which the writer guarantees the buyer, a receiver of floating, that he will pay the buyer whatever interest he loses if the rate he is receiving goes below an agreed rate, Y.

• Is the lower limit price or interest rate.

 
 Embedded terms in definition
 Assets
Cap
Floating rate
Floor rate
Interest rate
Interest
Liabilities
Limit price
Limit
Options
Option
Put option
Put
Receiver
Series
Will
Writer
 
 Referenced Terms
 Adjustable rate mortgage: Is a loan which has a coupon or interest rate that is subject to change on predetermined reset dates. These loans use interest rate indices as the benchmark rate. Adjustable Rate Mortgages come in many variations. Typically, the reset dates recur every 1, 3, or 5 years; but there are other periods used as well. These loans may have cap and Floor features which constrain each reset change in interest rates. There may also be lifetime cap and floor features. Adjustable Rate Mortgages may be strictly amortizing though some have negative amortization features.A mortgage whose interest rate changes periodically based on the upward or downward movement of a specified benchmark, e.g. six month or one-year Treasury bills.

 Auction market: Markets in which the prevailing price is determined through the free interaction of prospective buyers and sellers, as on the Floor of the stock exchange.A market in which buyers enter competitive bids, and sellers enter competitive offers simultaneously. The NYSE is an auction market.

 Broker: A broker brings buyers and sellers together for a commission paid by the initiator of the transaction or by both sides; he does not position. In the money market, brokers are active in markets in which banks buy and sell money and in interdealer markets.(1) An individual or firm that charges a fee or commission for executing buy and sell orders submitted by another individual or firm. (2) The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services. See also: Broker-Dealer.An individual who is paid a commission for executing customer orders. Either a Floor broker who executes orders on the floor of the exchange, or an upstairs broker who handles retail customers and their orders.Is the party who acts as an agent for his customer. The broker receives a commission as compensation. This person is also known as an AE, AP, IE, RR, or registered customer support person. Brokers are required to be licensed according to product lines and states when required.A broker brings buyers and sellers together for a transaction for which the broker receives a commission. Broker generally does not hold inventory or make a market for securities.

 Clearinghouse: An adjunct to a futures exchange through which transactions executed its Floor are settled by a process of matching purchases and sales. A clearing organization is also charged with the proper conduct of delivery procedures and the adequate financing of the entire operation.

 Collar: Is the combination of a long Cap position and a short Floor position. It is sometimes called a range forward or a fence. Generally, it is structured so that the net cost of the collar is zero or close to zero. This means that the debit expense for the long cap premium is offset by the credit received for the short floor premium. This term is also used to define the prepayment speed range for a credit instrument.An upper and lower limit on the interest rate on a floating-rate note.A Collar also refers to a combination of cap (call option on interest rates) and Floor (put option on interest rates). An investor who holds a collar is in effect protected from interest rate increases or interest rate declines.Buy a call and sell a put. If a firm buys jet fuel and wants protection against jet fuel increases, it can buy a call option with a higher exercise price than the current price and sell a put option (with lower exercise price than the current price) and limit the price fluctuations to be in between the exercise price of the call and the exercise price of the put.

 
 Related Terms
 Equity floor
Floor broker
Floor planning
Floor rate
Floor trader
Interest rate floor

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