An interest rate _____ is a call option on interest rates, a _____ is a put option on interest rates and a combination of the two is called a _____.

Question

Quizplus · Accepted Answer

A cap is a call option on interest rates, as it sets a maximum limit on the interest rate that can be paid. A floor is a put option on interest rates, as it sets a minimum limit on the interest rate that will be received. A combination of the two is called a collar. Therefore, the best choice is A.

An Interest Rate _____ Is a Call Option on Interest