Suppose the premium on a three year, four per cent floor is equal to the premium on a three year, eight per cent cap. This combination is referred to as
A) zero-cost warrant
B) zero-premium strap
C) zero-cost collar
D) zero-premium swap
E) zero-cost FRA

Question

Quizplus · Accepted Answer

A zero-cost collar involves buying a cap and selling a floor with the same expiration date and strike price. If the premium on the floor and cap are equal, the collar will have a zero net cost to the investor.

Suppose the Premium on a Three Year, Four Per Cent