Caplet

Wasn't that Romeo's family? Or maybe is was Juliet's...In finance terms, a caplet is a way to hedge against interest rates.

Got that? Alright, we'll back up a bit to understand this one. Usually, the interest rate on a caplet-based investment is based on LIBOR. LIBOR stands for London Interbank Offered Rate, and provides benchmark interest rates for short-term loans...basically the rates banks are offering to other banks. It includes rates for various maturities (overnight, one week, and 1, 2, 3, 6 and 12 months) in five different currencies.

So the LIBOR provides the interest rate, and then the investor can set the strike price (the price when the buy/sell contract can be executed) based on LIBOR. They can buy or sell based on the interest rate being assigned.

This is usually timed with a maturity or interest payment, to cap the maximum loss the investor can have.