Floor and Cap on Interest Rate

CFA Level I Derivatives
#1

Hello Everyone,

Please help me to understand why FRN issuer will require interest rate floor .

He is issuer so he should be most concern about the increasing LIBOR (coupon) ,thus cap is more helpful to him.

How floor will help in this case?

Thanks

#2

An FRN issuer won’t require an interest rate floor. They’d like an interest rate cap, but that’s an option in their favor, so they have to pay for it; a common method of paying for an interest rate cap is to include an interest rate floor as well (for which the bondholder has to pay).

#3

Hi magician,

That means it complete issuers interest collar by Short Put position (for purchase of call) and Long Call (for protection).

Please correct or complete me

Thanks

#4

You got it!