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Power cap

• Is a derivative that pays off from the long's perspective in an exponential manner. If the current market price of the benchmark is greater than the strike, then the long receives payment. The payment is determined by raising to the predetermined power the difference between the current price and the strike price. For the case of a 2 power cap, or raised to the second power, the difference between the current market and the strike is squared. For a cubed power cap, the payoff would be the difference between the current price less the strike raised to the third power. The powers can be whatever is agreed upon. It should be noted that the risk profiles show abrupt and accelerating movements.

 
 Embedded terms in definition
 Benchmark
Cap
Derivative
Long
Market
Risk
Strike price
 
 Related Terms
 Buying power
Cap
Earning power
Equity cap
Interest rate cap
Market cap or market capitalization
Power grid
Power of attorney
Purchasing power parity
Purchasing power risk
Relative purchasing power parity

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