Get a hang of the following story: Part 1, Tragedy: A new OTC step-up cap trade is consumated, where if the LIBOR rate goes above X, the seller pays LIBOR+50bp, on a notional of, let's say 100M. The cap's strike is set ATM. The trade description is taken to the risk manager, who has to OK it. Risk manger enters the trade into his risk management system and as soon as that happends the risk manager turns red and starts yelling at the trader: "Look, the delta on this trade is 180M!!! Dont you remember the delta limits? What the hell are you trying td do?" (Looking at the payoff for this instrument, it is clear that the payoff is discountinuous at the money and the "naive" delta would be approaching infinity there). The trader tries to argue that the delta can not be that high, that the most it could be is the 50bp * DV01 of the swap, but the risk manager does not listen. The marketer who already almost closed the deal, starts crying. The trader is in despair. Part 2, Comedy: Trader returns to his desk and phones the counterparty. They agree that instead of the step-up cap, they will enter into two separate deals - a regular cap with stirke X and a digital option with strike X and payoff of 50bp. The trader then gives the cap to the risk manager. which he signs off, since delta is about 0.5. Half an hour later, the trader gives the digital to RM and since the delta appears reasonable to the RM, he signs off on it too. Everyone is happy, marketer is almost having an orgasm. What do we learn from this story?