Discussion: "Interest Rate Caps and Floors"
Please respond to the following:
• Assess the volatility risk with an investment in a derivative, using an interest rate cap or floor in today's marketplace. Indicate whether or not you would advise financial institutions to engage in this type of investment. Provide support for your response.
• Assess the effectiveness of using the Black-Scholes model to value cap and floor type investments, indicating how any pitfalls with this method of valuation can be minimized. Provide support for your response.
• Please provide one citation/reference for your initial posting that is not your textbook. Please do not use Investopedia or Wikipedia.