buy cap sell floor and sell cap and buy floor

CFA Level II
#1

if buy cap sell floor and sell cap and buy floor both make a collar and do the same thing why do we choose either of them?

#2

the PnL profiles are mirror images of each other. They are not the same.

Sell Floor (say 3% strike), Buy Cap (say 5% strike): if rates go above 5% you’re making money, if rates go below 3% you’re losing money. You’re long rates.

Buy Floor (say 3% strike), Sell Cap (say 5% strike): if rates go above 5% you’re losing money, if rates go below 3% you’re making money. You’re short rates.

#3

It depends what we’re trying to collar.

If we are obligated to make floating rate payments, we would buy a cap to put a lid on our payments (and fund it by selling a floor).

If we are receiving floating rate payments, we would buy a floor to put a lower limit on these received payments (and fund it by selling a cap).

#4

‘buy cap sell floor’ puts limits to liabilities payments

‘sell cap buy floor’ puts limits to recievable payments