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Dear sir,
I was revising collars . Kaplan book collars is explained as buying a cap( a put option as normal but also sells a floor(a call option) .
I do not understand cap means buying call option and floor means buying put options.
why has Kaplan explained collars cap as a put option and floors as call option .A cap is where there is a maximum interest rate, and a floor is where there is a minimum interest rate.
If we are borrowing, then buying a put will fix a maximum (a cap) and selling a call will fix a minimum (a floor).
On the other hand, if we are depositing money, then buying a call will fix a minimum (a floor) and selling a put will fix a maximum (a cap).
If you have not yet read it, then I have posted a short article about caps, floors, and collars. You can find it linked from the main P4 page.
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