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Could you please explain to me what is the interest rate floor and interest rate collar?
One statement says an interest rate floor can be used to hedge an expected increase in interest rate. Why is it wrong?Also, what is “CAP”?Is it related to this statement?
A cap is fixing a maximum interest rate, and a floor is fixing a minimum interest rate (and a collar is fixing both 🙂 ).
These are all explained in detail (with examples) in my free lectures (although you cannot be asked calculation questions on them in Paper FM – only in Paper AFM).
The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Thank you so much for the explanation Sir, I’ll rewatch the corresponding lessons as well.
You are welcome 🙂
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