late October 2001. The underlying instrument is the notional price of the fixed-rate side of a 10-year interest rate swap that has a notional prin- cipal equal to $100,000 and that exchanges semi-annual interest pay- ments at a fixed annual rate of 6% for floating interest rate payments based on 3-month LIBOR. This swap futures contract is cash-settled with a settlement price determined by the ISDA benchmark 10-year swap rate on the last day of trading before the contract expires. This benchmark rate is published with a one day lag in the Federal Reserve Boards statis- tical release H.15. Contracts expire the third month of each quarter     (March, June, September and December) just like the other CBOT inter- est rate futures contracts. The last trading day is the second London busi- ness day preceding the third Wednesday of the expiration month. The swap futures contract will be priced just as a forward-start swap discussed earlier in this chapter. For example, the December 2001 swap futures contract will be for a new 10-year interest rate swap beginning on December 17, 2001. It is anticipated that this contract will be a valuable tool to hedge spread product.       CAPS AND FLOORS   An important option combination in debt markets is the cap and floor, which are used to control interest-rate risk exposure. Caps and floors are combina- tions of the same types of options (calls or puts) with identical strike prices but arranged to run over a range of time periods. In the last chapter, we reviewed the main instruments used to control interest-rate risk, including short-dated interest-rate futures and FRAs. For example, a corporation that desires to protect against a rise in future borrowing costs could buy FRAs or sell futures. These instruments allow the user to lock in the forward interest rate available today. However, such positions do not allow the hedger to gain if market rates actually move as feared/anticipated. Hedging with FRAs or futures can prevent loss but at the expense of any extra gain. To overcome this, the hedger might choose to construct the hedge using options. For inter- est rate hedges, primary instruments are the cap and floor.12 Caps and floors are agreements between two parties whereby one party for an upfront fee agrees to compensate the other if a designated interest rate (called the reference rate) is different from a predetermined level. The party that benefits if the reference rate differs from a perdeter- mined level is called the buyer and the party that must potentially make