A general cap/floor is similar to a cap/floor (see Cap and Floor) with one main difference—there is no dependency between the reference rate chosen, the frequency of the fixing dates and the frequency of the payment dates.
In a cap/floor, there is direct dependency between the reference rate and the frequency of the fixing and payment dates. So, for example, if the cap/floor’s reference rate is based on 3m LIBOR, its fixing and payment frequency must be quarterly; if the reference rate is based on 1m LIBOR, the fixing and payment frequency must be monthly. Similarly, if you select an annual fixing and payment frequency for a vanilla cap/floor, its reference rate is automatically based on 12m LIBOR.
However, in a general cap/floor, the reference rate, fixing frequency and payment frequency are all independent of one another. You can therefore choose, for example, a reference rate of 3m LIBOR, a semi annual fixing frequency and a monthly payment frequency.
Advantages of General Cap/Floor
The main advantage of the general cap/floor over a cap/floor is the flexibility and control it gives you over the fixing and payment frequencies, which therefore allow you to tailor the product to match the nature of the underlying exposure.
Pricing a General Cap/Floor 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 general cap/floor.
The upfront payment to be made for a general cap/floor is shown in the Market Price result. The Amortize premium result shows the annual periodic payment that would be paid if the general cap/floor 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