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Sep/Dec 15 hybrid paper

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Sep/Dec 15 hybrid paper

  • This topic has 1 reply, 2 voices, and was last updated 10 years ago by John Moffat.
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  • February 5, 2016 at 3:13 pm #299391
    Robert
    Member
    • Topics: 57
    • Replies: 174
    • ☆☆☆

    Hi john, in this paper question 2 the question asked to hedge a deposit using options.
    It then asked to hedge using a collar.

    May I ask as the depositor was therefore limiting upside interest rates – this transaction should be termed a cap rather than a collar?

    Many thanks

    February 6, 2016 at 8:29 am #299444
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54833
    • ☆☆☆☆☆

    Limiting the maximum rate is indeed a cap, but limiting a minimum rate is a floor.

    Limiting both at the same time is a collar.

    You will find explanation of collars in the free lectures and in addition there is an extra note explaining them as well.

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