How to hedge against interest rate volatility buy caps and and sell floors .Or buy caps and buy floors
If you think that interest rate volatility will increase, but you have no idea about the direction (increase or decrease), you’ll benefit by buying both caps and floors. If you think that interest rates will increase, you’re best off to be long a collar (long caps, short floors), while if you think that interest rates will decrease, you’re best off to be short a collar (short caps, long floors), in each the short position (which you expect to expire worthless) helping to finance the long position.
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