No I think it was about possibility of capturing the upside while reducing cost on downside. So if the rate was 5%. Having a collar of 3% to 5% would result in capturing the upside while protecting downside upto 3%. ( Also I think it metioned that rates were already down and he thougt the rates were going to go up. But he still wanted some protection from further downside. )
its been almost a week so my memory is foggy, and i might be mixing together a couple different questions. so with no offense meant, i think the question said he was trying to protect against rates going down (which means long put, right?) and there wasn’t a big worry about rates going up very far so could finance with an out of the money call. The wording of the question, if i recall from another thread, has been questioned…in other words there was confusion on AF whether the guy was trying to hedge an options position he already had or, what i remember, he was looking at an alternative which would protect a further fall in rates with minimal cost and he didn’t consider a spike in rates a likelihood. Anyone else care to chime in, cuz netjade and i seem to be at an impass.
I agree with petetini. This question has already been discussed you might want to do a search on that. It is also possible that you had a different exam version.