A reverse collar consists of:
A) buying an interest rate floor and an interest rate cap.
B) buying an interest rate floor and selling an interest rate cap.
C) selling an interest rate floor and buying an interest rate cap.
D) buying a call option and selling a futures contract.
E) selling a put option and buying a futures contract.

Question

Quizplus · Accepted Answer

A reverse collar in the context of interest rates involves buying an interest rate floor, which provides protection against falling interest rates, and selling an interest rate cap, which offers a premium in exchange for giving up the benefit of rising interest rates beyond a certain point. This strategy is used to hedge interest rate risk while potentially earning income from the sold cap.

A Reverse Collar Consists Of