An interest rate _____ is a call option on interest rates, a _____ is a put option on interest rates and a combination of the two is called a _____.
A) cap; floor; collar
B) ceiling; cap; collar
C) floor; cap; caption
D) caption; floor; cap
E) cap; floor; caption

Question

Quizplus · Accepted Answer

An interest rate cap is a type of derivative that pays the buyer when interest rates rise above a certain level, functioning like a call option on interest rates. A floor is the opposite, paying the buyer when rates fall below a certain level, acting as a put option on interest rates. A collar is a combination of a cap and a floor, used to hedge interest rate movements.

An Interest Rate _____ Is a Call Option on Interest