An interest rate ____ is a combination of a cap and a floor.
A) Swap
B) FRA
C) LIBOR
D) Collar
E) None of the above

Question

Quizplus · Accepted Answer

A collar is an interest rate derivative that combines a cap and a floor, which is used to limit the interest rate risk exposure for the borrower. A cap sets an upper limit or ceiling on the interest rate, while a floor sets a lower limit or a minimum interest rate. Therefore, a collar provides protection to the borrower by limiting the potential increase in borrowing costs while also capping the potential savings if interest rates fall below the floor. Neither A) Swap nor B) FRA nor C) LIBOR includes a combination of cap and floor.

An Interest Rate ____ Is a Combination of a Cap