Which of the following best describes an interest rate cap?
A)a cash-and-carry hedge
B)a series of forward contracts
C)a series of interest rate calls
D)a call option spread
E)none of the above

Question

Quizplus · Accepted Answer

An interest rate cap is a series of interest rate calls, which is a type of derivative that provides the holder with the right, but not the obligation, to buy an underlying asset at a predetermined price within a specific time period. In this case, the underlying asset is an interest rate, and the cap sets a maximum limit on the rate for a certain period of time. Therefore, option C is the best choice as it accurately describes an interest rate cap.

Which of the Following Best Describes an Interest Rate Cap