It is to limit the increase in the cost of floating rate loans or other liabilities by signing contracts and agreeing on the interest rate ceiling. Generally traded in the international interbank market. If the market interest rate exceeds the agreed interest rate ceiling, the seller of the option pays the interest rate difference to the buyer of the option. On the other hand, the buyer waives this right. When signing the interest rate ceiling contract, the buyer, that is, the option holder, pays a certain percentage of the capping fee to the seller, that is, the contractor, as the cost of transferring interest rate risk. The term of the interest rate capping option is generally 2-5 years, which is more suitable for medium and long-term loans.

It refers to a contract in which the seller promises to compensate the buyer for the excess spread loss according to the agreed interest rate level when the market reference interest rate falls below the predetermined minimum interest rate within the agreement period after the seller collects the handling fee. When the debtor thinks that it is unlikely that the market interest rate will fall to a certain level, he will consider selling the income below a certain level to the bank by means of "back cover", and stipulate that if the market interest rate falls below the agreed interest rate level within the signing period, the debtor will bear part of the spread of the agreed interest rate to the bank. Because the debtor is the seller's interest rate option, it can get a certain premium from the bank, which can be used to reduce the debt cost. The "back cover" of interest rate enables the debtor of floating rate loans to take advantage of the accuracy of market forecast, collect premiums and reduce the loan cost, but once the interest rate falls below the "back cover" level, the debtor will bear certain losses.

The above two methods of interest rate options are to seal the upper and lower limits of floating interest rates in half to prevent the risks brought by rising interest rates or reduce borrowing costs. However, these two methods have their own advantages and disadvantages. The "two-letter" option business combines the advantages of these two methods, seals the exposure of floating interest rates, forms a limited scope of prevention, and operates futures contracts. Case analysis of interest rate option

Suppose Company A has a current debt with a maturity of 6 months and a cash amount of 5 million dollars, then from the company's point of view, it hopes to enjoy the benefits of LIBOR interest rate when the market interest rate falls, and at the same time, it wants to avoid the risk of interest cost increase when the market interest rate rises. At this time, enterprises can choose to trade interest rate options with banks and purchase interest rate ceiling options with an agreed interest rate of 6% for a period of 6 months. If the LIBOR interest rate rises to 7% (greater than the original contract interest rate) after 6 months, then Company A will choose to exercise the option, and the bank as the option seller will pay the difference of 50,000 US dollars (500×(7%-6%)). As the buyer of the option contract, Company A fixed its debt cost correctly and effectively because of its judgment.

Then, if the trend of LIBOR falls below 6%, then Company A can choose to give up the option and pay the debt interest at a lower market interest rate, and the loss is only the option fee.

In the actual operation process, the enterprise can set the amount, term, expiration date and exercise price of option trading according to the actual demand, and the buyer pays the option fee to control risks and increase profit opportunities. The seller charges the option fee to reduce the cost.