A floor, which puts a minimum on floating rate interest payments is equivalent to owning calls on fixed income securities which will pay when interest rates fall.
I do not seem to get this. Shouldnt this be equivalent to owning puts ? You get paid when the interest rate goes down from say 4% ( your floor) to 2%(current interest rate). Instead of getting paid at 2% you get paid at 4% ? This is equivalent of a put right ? how come they say its equivalent of “owning a call”.
fixed income security RISES in value when RATE FALLS.
So it is Owning a Call …
This is confusing - in one part they talk of a Interest Rate derivative (the floor on the rate) - and immediately turn around and talk about a CALL On A BOND.
oh thanks CPK123, i did not read the question correctly, i was thinking of the call on the interest rate !
That is why the experts say …read the F******* damn question.! (RFQ approach)
No offense meant to you CPK123.
That was for me. And this is one among the tips to pay attention to clear the exam ! 