CAP AGREEMENT Meaning and
Definition
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A cap agreement, also known as a cap contract or cap agreement, is a financial derivative contract between two parties that offers protection from adverse movements in interest rates. It is commonly used by borrowers to limit their exposure to rising interest rates on floating-rate debt.
In a cap agreement, the purchaser pays a premium to the seller, known as the cap seller or writer, to obtain the right to receive compensation if a specified interest rate, called the cap rate, exceeds a predetermined level, known as the cap strike rate. The compensation received by the purchaser is calculated based on the difference between the cap rate and the actual interest rate prevailing in the market during the cap agreement's term.
By entering into a cap agreement, the purchaser can mitigate the risk of making higher interest payments as the cap provides a ceiling beyond which interest rates cannot rise for the capped portion of the debt. This allows the borrower to benefit from lower interest rates while enjoying protection against interest rate hikes.
A cap agreement is beneficial for borrowers who anticipate that interest rates may increase in the future, as it provides a cost-effective strategy to hedge against that risk. It offers financial stability by limiting the borrower's exposure to interest rate fluctuations and ensuring consistent interest payments over the life of the agreement.
Common Misspellings for CAP AGREEMENT
- xap agreement
- vap agreement
- fap agreement
- dap agreement
- czp agreement
- csp agreement
- cwp agreement
- cqp agreement
- cao agreement
- cal agreement
- ca- agreement
- ca0 agreement
- cap zgreement
- cap sgreement
- cap wgreement
- cap qgreement
- cap afreement
- cap avreement
- cap abreement
- cap ahreement
Etymology of CAP AGREEMENT
The term "CAP agreement" does not have a specific etymology as it is a combination of two words: "CAP" and "agreement". However, I can provide the etymology of each individual word:
1. CAP: The word "CAP" itself has multiple meanings and origins. In the context of "CAP agreement", it is often an acronym standing for Common Agricultural Policy, which refers to the agricultural policy of the European Union. The acronym "CAP" originated in English in the mid-20th century with the establishment of the policy in 1962.
2. Agreement: The word "agreement" comes from the Latin word "agreementum", which means "to come together" or "to make an arrangement". The term entered the English language around the 14th century.
So, in combination, a "CAP agreement" refers to an agreement or arrangement related to the Common Agricultural Policy within the European Union.
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