2: Hedging with LIBOR Floors

Hedging with LIBOR Floors: Caps are better than Swaps: During the current low interest rate environment, LIBOR floors have been required by lenders in variable rate loans to boost their returns. Such loans can be hedged using either interest rate swaps or caps. This white paper analyzes the benefits of choosing a cap over a swap, even though caps require up-front payments. The benefits include (1) flexibility on termination, (2) lower interest costs and (3) a possible return on the sale of the cap.