An interest rate cap can be established by buying put options on successive BAB futures contracts.

Question

Quizplus · Accepted Answer

By buying put options on BAB futures contracts, the buyer has the right to sell the underlying asset (BAB futures contract) at a predetermined price (strike price) before the option expires. This provides protection against interest rate increases, as the put option will become more valuable as the underlying asset (BAB futures contract) decreases in price due to rising interest rates. Therefore, buying put options on successive BAB futures contracts can establish an interest rate cap.

An Interest Rate Cap Can Be Established by Buying Put