A cap/floor straddle is a combination of a cap and a floor, in which you either buy a cap and buy a floor with the same strike and tenor, or sell a cap and sell a floor with the same strike and tenor.
Advantages of a Cap/Floor Straddle Strategy
Investors enter into cap/floor straddles to benefit from considerable movement in an interest rate in either direction.
Pricing a Cap/Floor Straddle in SDX Interest Rates
When pricing a cap/floor straddle in SDX Interest Rates:
The premium, which is expressed as a percentage of the notional, is usually paid upfront. However, it can also be paid in installments over the life of the cap/floor straddle.
The upfront payment to be made for a cap/floor straddle is shown in the Market Price result. The Amortize premium result shows the annual periodic payment that would be paid if the cap/floor straddle was bought in installments.
By default the Amortize premium result is not displayed. You can choose to display it in the Settings window. For more information see Displaying the Cap/Floor Premium as an Amortized Value .
A cap/floor straddle can be priced as a variation of a cap/floor or as its own instrument.
You can also enter your own market volatility and then re-calculate the Greeks and various values. See Market Vol.
To price a cap/floor straddle:
You can do either of the following:
In the Option/Swap dropdown list from the Cap/Floor list click a vanilla cap/floor and then toggle the button to Straddle.
In the Option/Swap dropdown list from the Cap/Floor list click Straddle.