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Interest rate floor/collar

This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.

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September 3, 2021 at 12:35 pm #634142
syedmushahid
Participant
- Topics: 22
- Replies: 50
Sir as per your lecture interest floor is the minimum an investor set for himself on deposit
And collar the max on borrowing
There is a questio in Kaplan kit
The cost of interest rate floor is higher than the cost of an interest rate collar
(True/false)
To me it looked false but kit says true.how?
September 3, 2021 at 4:26 pm #634165
John Moffat
Keymaster
- Topics: 57
- Replies: 51532
That is true. We pay a premium to fix the floor, but if we create a collar then we also receive a premium from the person we sell an option to and this creates a cap.
I do explain collars in detail in my free lectures on the management of interest rate risk.
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