Question ID#: 10502 If one wants to hedge a hypothetical short position in the floating rate bond, which of the following is the best hedge? A) Buy an interest rate floor. B) Sell an interest rate cap. C) Buy an interest rate cap. D) Sell an interest rate floor. Thoughts?
So if you have SHORT floating-bond means you are the issuer and worried about interest rate going high, to hedge this off you would buy a Interest Rate Cap, so that limit the volatility of your floating rate bond to the cap level. above which the cap would start paying and you would use that amount collected as a passthrough to pass it on to the bondhlders. So is C correct? Its Summer … It’s Friday night … and we are talking options here. I hate my life!
Since you are currently paying a floating rate, you want to recieve cash when rates get too high. Buy an interest rate cap and when rates exceed the cap rate, you get paid. C I say.
C it is! Good work.