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Interest rate floor/collar

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Interest rate floor/collar

  • This topic has 1 reply, 2 voices, and was last updated 10 months ago by John Moffat.
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  • September 3, 2021 at 12:35 pm #634142
    syedmushahid
    • Topics: 18
    • Replies: 35
    • ☆☆

    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: 49602
    • ☆☆☆☆☆

    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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