Can anyone please help me understand how the answer for the below question could be logically correct.
Question ID#: 92162
Which of the following is the best definition of cap risk? Cap risk is the risk:
A) that the funding rate used to purchase a floating rate note exceeds the note’s cap rate.
B) associated with the issuer of a floating rate note with an embedded cap.
C) that a floating rate note has an embedded cap.
The correct answer was A.
Cap risk is the risk that the cost of the firm’s interest rate-sensitive liabilities exceeds the return on its capped assets in an environment of rising interst rates. Cap risk is a particular concern to investors who borrow at a floating rate