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No. They can be OTC, but in exam questions they have always been traded options.
also sir i had another doubt about interest rate caps; how are interest rate caps defined as a series of call options?
two doubts related to this statement:
1- aren’t interest rate caps involving put option?
2- isn’t it of one put option only instead of a ‘series’?You are obviously not reading my lecture notes and watching my lectures – it is very annoying to have to type out what is in them again! 🙁
A borrower will indeed buy a put option in order to fix the maximum interest rate – so a cap.
An investor will buy a call option in order to fix the minimum rate, but this is a floor and not a cap.As far as the second statement is concerned, then yes – certainly as far as the exam is concerned it will be just one option and not a series. I suppose in ‘real life’ a series of options may be considered if the interest rate is floating,
Sir i have watched your lectures thoroughly once at least. The reason why I asked it is because this sentence was a part of an answer mentioned in my exam kit, and i thought it was clearly wrong. But then just to confirm( given it came from a credible source) and check the veracity of the statement I posted it here
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