Buying a ________ is equivalent to buying a package of puts on a fixed- income instrument and buying a ________ is equivalent to buying a package of calls on a fixed-income instrument.

Question

Quizplus · Accepted Answer

Buying a cap is equivalent to buying a package of calls on a fixed-income instrument because it limits the maximum interest rate that can be paid, while buying a floor is equivalent to buying a package of puts because it limits the minimum interest rate that can be paid. Therefore, the correct choice is B, where the first blank is filled with "cap (long cap)" and the second blank is filled with "floor (long floor)."

Buying a ________ Is Equivalent to Buying a Package of Puts