When interest rates are forecasted to rise,a company approaches its bank before the next roll-over date of its current debt facilities,and buys an interest rate cap option.However,the company is concerned at the cost of the cap premium and decides to simultaneously sell an interest rate floor option of the same maturity.Which of the following statements is correct?

Question

Quizplus · Accepted Answer

By buying an interest rate cap option and selling an interest rate floor option simultaneously, the company has implemented a collar option strategy, which limits both the maximum and minimum interest rate payments that the company would make. The cost of the cap premium is offset by the proceeds received from selling the floor option, which means that the strategy is not likely to have a zero cost outcome for the company. The transactions are not an exchange-traded options contract as they are customized to the needs of the company. Therefore, option B is the correct choice.

When Interest Rates Are Forecasted to Rise,a Company Approaches Its