Sep/Dec 15 hybrid paper

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February 5, 2016 at 3:13 pm #299391
Robert
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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
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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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