A firm with a variable-rate loan wants to protect itself from increases in interest rates.Which of the following would interest this firm?
I.interest rate floor
II.interest rate cap
III.put option on an interest rate
IV.call option on an interest rate
A)I only
B)I and III only
C)I and IV only
D)II and III only
E)II and IV only

Question

Quizplus · Accepted Answer

An interest rate cap would protect the firm by setting a maximum interest rate it will pay, while a call option on an interest rate allows the firm to benefit from lower rates but protect against higher rates.

A Firm with a Variable-Rate Loan Wants to Protect Itself