Good Student
Posts: 22
Joined: Sat Apr 26, 2014 7:29 am


Postby sessiljoseph » Wed May 07, 2014 7:42 am

for a five year ATMcap on the 3 month LIBOR,what can be said about the individualcaplets in a downward sloping term structure enviornment
a, the short maturity caplets are ITM, long maturity caplets are otm
the short maturity caplets arrOTM long maturity caplets are itm
all the caplets are atm
the moneyness of the individual caplets also depends on the voltalityterm structure
please explain this question
my other doubt is for the downward sloping curve short terms will increase or long term
source of question from quiz of fmp

Finance Junkie
Posts: 946
Joined: Wed Apr 09, 2014 6:28 am


Postby edupristine » Thu May 08, 2014 11:22 am

In a down-ward sloping rate environment, forward rates are higher for short maturities. Caplets involves the right to buy at the same fixed rate for all caplets. Hence, short maturities are ITM.
Answer is A.

Return to “CFA Level I”


Global Association of Risk Professionals, Inc. (GARP®) does not endorse, promote, review or warrant the accuracy of the products or services offered by EduPristine for FRM® related information, nor does it endorse any pass rates claimed by the provider. Further, GARP® is not responsible for any fees or costs paid by the user to EduPristine nor is GARP® responsible for any fees or costs of any person or entity providing any services to EduPristine Study Program. FRM®, GARP® and Global Association of Risk Professionals®, are trademarks owned by the Global Association of Risk Professionals, Inc

CFA Institute does not endorse, promote, or warrant the accuracy or quality of the products or services offered by EduPristine. CFA Institute, CFA®, Claritas® and Chartered Financial Analyst® are trademarks owned by CFA Institute.

Utmost care has been taken to ensure that there is no copyright violation or infringement in any of our content. Still, in case you feel that there is any copyright violation of any kind please send a mail to and we will rectify it.