Caps and floors are used in conjunction with derivatives to:
A)limit any impact from interest rate changes.
B)increase the rate of return to the derivative holder.
C)increase the volatility of the at-risk asset.
D)offset the costs associated with establishing the derivative position.
E)lower acquisition costs irrespective of financing costs.

Question

Quizplus · Accepted Answer

Caps and floors are used to limit the impact of interest rate changes on a derivative position. A cap sets a maximum interest rate that the derivative holder will receive, while a floor sets a minimum interest rate. By using caps and floors, the derivative holder can protect themselves from interest rate fluctuations beyond the set limits.

Caps and Floors Are Used in Conjunction with Derivatives To