23-45 Banks that are more exposed to rising interest rates than falling interest rates may seek to finance a cap by selling a floor.

Question

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Banks that are more exposed to rising interest rates may seek to finance a cap by selling a floor, as a floor will limit their loss if interest rates fall while a cap will limit their gain if interest rates rise. Therefore, they may sell a floor to offset the cost of financing a cap.

23-45 Banks That Are More Exposed to Rising Interest Rates