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Interest Rate Cap Agreement Accounting

For a given hedging structure (i.e. nominal rate, maturity and exercise rate), cap pricing fluctuates over time based on changes in: In addition, fair value interest rate swaps must meet the following additional criteria: a reverse rate collar is the simultaneous purchase of an interest rate floor and the simultaneous sale of an interest rate ceiling. An interest rate item is a kind of interest rate derivative in which the buyer receives payments at the end of each period in which the interest rate exceeds the agreed exercise price. An example of a cap would be an agreement to get a payment per month exceeding the LIBOR rate above 2.5%. Mathematically, a caplet payment on an interest rate taken at K The interest rate ceiling can be analyzed as a series of European call options called « caplets » that exist for each period during which the cap agreement is concluded. As a rule, to exercise a ceiling, its buyer is not required to notify the seller, because the ceiling is exercised automatically when the interest rate exceeds the exercise rate (interest rate). [1] Note that this auto exercise feature is different from most other types of options. Each caplet is paid in cash at the end of the period to which it relates. [1] The shortcut method greatly simplifies hedge accounting for interest rate swap contracts. The fair values of the swap arrangements as at December 31, 2016 amounted to $4 million in assets and liabilities of $62 million and are included in the consolidated balance sheet as other long-term assets or other long-term liabilities. The fair value of the swap arrangements as at December 31, 2015, consisting of $11 million in assets and liabilities of $2 million and is included in the consolidated balance sheet in other long-term assets or other long-term liabilities. .

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