Caps and Floors vs Swaptions
Both are over-the-counter options on interest rates. Whether the option is on the rate for each period or an interest rate swap changes the unit of exercise and what follows it.
| Point of comparison | Caps and floors | Swaptions |
|---|---|---|
| What the option is on | Caps and floors are on a floating benchmark rate such as TIBOR, and the rate for each period is compared with the strike rate | Swaptions are on an interest rate swap, and the strike rate sets the fixed rate of the swap that would start |
| Exercise unit and frequency | Payments are set for each interest period (each caplet or floorlet), so there is one exercise point per period | The buyer decides at expiry whether to exercise (for a European swaption, which can be exercised only at expiry) |
| What follows exercise | At the end of the period, the buyer receives the difference between the benchmark rate and the strike rate times the notional amount and the length of the period, and the notional amount itself is not exchanged | On exercise, an interest rate swap with the strike rate as its fixed rate starts (with cash settlement, only the difference based on the swap's market value at exercise is paid) |
| Buyer's premium and loss | The buyer pays a premium, and the loss is limited to the premium paid | The buyer pays a premium; if the buyer does not exercise, no swap starts, and the loss is limited to the premium |
| Typical uses | Used to cap interest payments on floating-rate borrowing (caps) and to hedge the risk of floors built into products such as structured deposits (floors) | Used by financial institutions to hedge interest rate risk, and by life insurers to cover mismatches between the interest rate risk of their assets and liabilities |
The table follows the explanations and sources in the linked articles.
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Last reviewed: 2026-10-19