alleryStart learning →Why does a collar buyer sell a floor?
ATo defer margin calls
BTo raise the loan amount
CTo extend the maturity
DTo earn premium income
Answer & Solution
Correct answer: D. To earn premium income
Selling the floor generates premium income that offsets the cost of the cap.
Keep practising Interest Rate Risk
Browse all Interest Rate Risk questions for CA Final, or explore more Strategicfinancialmanagement topics.
Related questions
A borrower buys an FRA at 7%. Its loan resets at 9%. Effective cost is about?Firm A pays 8% fixed or MIBOR+1%; B pays 10% fixed or MIBOR+2%. Quality spread differentiaA bank has Rs 500 cr rate-sensitive assets and Rs 350 cr liabilities. Rates rise 1%. IncomBond modified duration is 4.5. Yield rises 0.5 points. Approx price change?Eurodollar price rises 95.50 to 95.60. Long gain per contract (tick 0.005, $12.50)?A Eurodollar future trades at 96.40. What rate does it imply?A Eurodollar future implies a 3-month rate of 4.25%. Its price is?Same collar, 8% cap and 5% floor sold. Rate falls to 4%. Effective rate?