Managing interest rate risk for less creditworthy FI's by running a cap/floor book may require the backing of external guarantees such as standby letters of credit because of the nature of the options.

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Running a cap/floor book involves the use of options which can expose the financial institution to significant losses if interest rates move unfavorably. For less creditworthy financial institutions, external guarantees such as standby letters of credit may be required to provide added security to counterparties who may otherwise be reluctant to trade with them.

Managing Interest Rate Risk for Less Creditworthy FI's by Running