A floating-rate borrower wants to use a collar as a hedge. Which of the following is appropriate?
A) Buy a cap and sell a floor
B) Buy a cap and buy a floor
C) Sell a cap and sell a floor
D) Sell a cap and buy a floor

Question

Quizplus · Accepted Answer

A collar involves buying a cap to limit the maximum interest rate and selling a floor to offset the cost of the cap, thus providing a hedge for a floating-rate borrower.

A Floating-Rate Borrower Wants to Use a Collar as a Hedge