Schweser in Book 5 page 130 states that If an investor with a LIBOR-based liability, you would purchase a cap and sell a floor If investor have a LIBOR-based asset, you would purchase a floor and sell a cap. What do they mean by LIBOR-based asset or a LIBOR-based liability?
The way I would think about LIBOR based liability. Liability means you are taking a loan. Imagine mortgage rates and ARM expiring. So you want to CAP the high interest rate risk on a loan. Buy a CAP and sell the floor. Think opposite for asset.
ah~~ thanks