caps and floors payments, confusion, therefore, discount

LorrinCFA

Just experiencing some confusion with Schweser notes on caps and floors. In chapter 62.b it says their payoff is in arrears and therefore you need to discount to get value at expiration.

Ie [ (one-yr rate - cap rate) * notional principal ] / ( 1+one-yr rate)

However when visiting caps and floors again in chapter 64 there is mention of payments in arrears or discounting. I cant stop any reasons for this discrepency, if anyone can shed light on the matter it would be much appreciated.

brainsX

Sorry should have said no mention of discounting or payments in arrears in chapter 64.

Kapie

In reading 64 Shweser is talking about payoff schedule, not about value of the cap/floor, so no discounting.

profil

Just what JPSI said...payoff at expiration is not discounted. To value the cap or floor, you need to discount.