Please explain: An investor who bought a floating-rate security and wishes to establish a minimum periodic cash flow on his investment could: A) buy an interest-rate floor. B) sell an interest-rate cap. C) buy an interest-rate cap. D) sell an interest-rate floor. Thanks S
is it A?
I always get confused on these ones. A ??
A
Establishing a minimum cf - buy floor, answer A
A is the right answer but I was hoping someone would explain this. Thanks
A because he own a fluctuating interest rate security which can give him a higher interest or a lower interest. He is worried of the lower interest and to cushon the risk of receiving a lower interest he has to buy an insurance which will give give an interest rate not lower than (floor) the rate purchased in the deal.
It is A, as explained… Also he could also sell some cap to defray the cost of the floor (if he is OK with parting with the windfall that comes when the rates go up, in return for the certainty/insurance of a floor)
I have gone mad with interest rate thingy! How many tools are there - FRA, interest rate options, was something in Futures as well? is there anything about it in Swap? - haven’t reached there yet. S