I’m wondering if anyone can help me figure out how you can create an interest rate collar by selling a cap and buying a floor. Say you sell a cap at 7% and buy a floor at 3%, how is it that you are locking in rates between 3-7% as Schweser says. In the CFAI book, it only says a collar is created buy buying a call and selling a floor. If rates go above 7% isn’t there a hypothetically unlimited upside that you would be exposed to. And the other side you only get the benefit of rates going below 3%. Can anyone clear this up, thanks!
for floating rate liability you do this. Let me know if I not correct
let’s say you bought a floating rate bond. you receive coupons that depend on a reference rate. As a person who wants to hedge his returns, you’d like to receive at least 3% and 7% is high enough for you. You buy a floor at 3% and sell a ceiling at 7% to reduce the cost of the floor.
any easy way to remember this…I am thinking I have to protect myself when I pay int. by getting the excesss from a cap in case rates go up and protect myself from getting to little int. if rates drop by someone else paying me the diff if rates drop…
hey, what page (schweser or CFAI) are interest rate collars on? i was looking for it today and couldn’t really find it. found a the interest rate cap and FRA sections. but didn’t see the word “collar” anywhere. and i remember it from earlier studying. this was schweser that i searched.
West, it’s on page 309 in the CFAI book, in the Derivatives and PM Book…