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Dear Sir/Madam,
I have actually understood interest rate caps and floors but would still like some clarity and it would be of great help if you could simplify with an example.
Also, my main problem is with collars. The following is given in Kaplan text which I’m unable to understand.
” A borrower would buy a cap and sell a floor. If interest rate falls then it would get no benefit from the cap but would make a premium from selling the floor.” (I don’t understand what Premium and how).I would really appreciate if you could explain in detail.
Thank you in advance.
Regards,
Rajvir Singh OberaiDetail on this is not required for Paper F9 – it is only at P4 that it is examined in great detail.
In Paper F9 you cannot be asked for any calculations on interest rate risk.Everything needed for Paper F9 (including collars) is explained in Chapter 24 of our free lecture notes, and the lectures that go with it.
The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
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