Double Strike Floor and Double Strike Cap (N-Floor and N-Cap) are modifications of the Interest Rate Floor/Cap. In a Knock-Out Floor/Cap, once the trigger rate is breached (Knock-Out or KO event), the protection of the Floor disappears for that period. In a Knock-In Floor/Cap, protection does not appear unless the trigger is breached (Knock-In or KI event). Here are examples of payoff profiles for Double Strike Floor and Cap.
There is a lot on misunderstanding in interpretation of risk and uncertainty. To understand the difference between these two terms begin by exploring what is meant by “risk”. In general, risk is the chance of injury, damage, or loss (Webster’s New World Dictionary).
Risk: We don’t know what will happen in future, but we do know the distribution of future outcomes.
Uncertainty: We don’t know what will happen in future, and we don’t know what the possible outcome distribution is.
In other words, the future is always unknown — but that does not make it “uncertain.”
Although the definitions we have just provided are very simple, they can explain a lot when going into details.
The delta equivalents of a position describe the response of a position/portfolio to a change in the market data.
Delta equivalent is the derivative of the Present Value with respect to a given risk factor, multiplied by the value (price) of that particular risk factor:
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Marginal Expected Exposure (Marginal EE) represents the effect of each specific contract on aggregated Expected Exposure of the portfolio. This concept is useful for understanding which trades are contributing most to the total portfolio risk, as well as for assessing the return on a specific trade against its contribution to total exposure. If portfolio includes only one contract, then Marginal Exposure of this contract equals to portfolio exposure.
The goal is to find allocations of that reflect
trade contribution to the overall risk for each period
and sum up to the counterparty-level
.