The price of an interest rate cap is determined by:

The price of an interest rate cap is determined by:

I. The period to which the cap relates

II. Volatility of the underlying interest rate

III. The exercise or the strike rate

IV. The risk free rate
A . I, II, III and IV
B . I, II and III
C . II, III and IV
D . I, II and IV

Answer: B

Explanation:

The price of an interest rate cap is affected by all of the listed choices except the risk free rate. The risk free rate does not come into play in the pricing of caps, and therefore Choice ‘b’ is the correct answer.