An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.

Question

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An interest rate collar is a financial derivative that allows the buyer to limit their exposure to changes in interest rates by purchasing an interest rate cap (which provides protection against rising interest rates) and simultaneously selling an interest rate floor (which offsets the cost of the cap by obligating the seller to make payments if the interest rate falls below a certain level).

An Interest Rate Collar Involves the Purchase of an Interest