Cap and Capacity: Difference between pages

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1.  
1. ''Law''.  
An option hedging structure which effectively establishes a maximum worst case hedged rate or price for a cash outflow or a liability, while allowing the holder of the cap to retain the potential benefit of more favourable lower market rates or prices. If creating a cap for an extended period the transaction can be structured into a series of "caplets", each caplet being for a set period coinciding with the interest periods of the borrowing being hedged eg 3 month LIBOR.
Anyone can enter a contract, whether or not they have ‘capacity’ to do so. But if an individual who lacks contractual capacity enters a contract, the contract may not be enforceable.
 
Problems of capacity may arise in relation to minors, mental incapacity or intoxication.


2.  
2.  
A risk management arrangement whereby limits are placed on the positions that participants in an interbank funds transfer system can incur during the business day.  
More generally, the ability to absorb or hold.  For example, tax capacity or borrowing capacity.
(Tax capacity being the ability to use tax reliefs efficiently to shelter otherwise taxable profits or gains. Borrowing capacity being the maximum amount of borrowing which can be sustained based on a firm's expected future cashflows and its assets.)


They may be set by each individual participant or by the body governing the transfer system; they can be set in multilateral net, bilateral net or (less commonly) gross terms and can be either a credit cap or a debit cap; for example, bilateral net credit caps, set by an individual participant, will constitute a limit on the credit exposure which that participant will accept in relation to each other participant.  
3. ''Banking''.
In relation to the individuals whom a bank will authorise to open and operate a bank account, the appropriate level of seniority and the role of the individuals within the business of the customer.


In contrast, sender net debit caps, which may for example be set by the governing body of the clearing system based on a particular formula, limit the aggregate value of transfers that an individual participant may send to all other participants over and above its incoming transfers. 
== See also ==
 
* [[Contract]]
Sender net debit limits may be either collateralised or uncollateralised.


== See also ==
[[Category:Regulation_and_Law]]
* [[Capped FRN]]
* [[Collar hedge]]
* [[Floor]]
* [[Interest rate cap]]
* [[Interest rate collar]]
* [[Notional amount]]
* [[CertICM]]

Revision as of 08:33, 8 October 2013

1. Law. Anyone can enter a contract, whether or not they have ‘capacity’ to do so. But if an individual who lacks contractual capacity enters a contract, the contract may not be enforceable. Problems of capacity may arise in relation to minors, mental incapacity or intoxication.

2. More generally, the ability to absorb or hold. For example, tax capacity or borrowing capacity. (Tax capacity being the ability to use tax reliefs efficiently to shelter otherwise taxable profits or gains. Borrowing capacity being the maximum amount of borrowing which can be sustained based on a firm's expected future cashflows and its assets.)

3. Banking. In relation to the individuals whom a bank will authorise to open and operate a bank account, the appropriate level of seniority and the role of the individuals within the business of the customer.

See also

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