Why Might a Bank That Has Purchased a Cap Also

question 62

Multiple Choice

Why might a bank that has purchased a cap also wish to also sell a floor?

• A) By themselves, caps are ineffective at limiting changes in a bank's cost of funds in a desirable way.
• B) Regulators require one to be used with the other.
• C) Selling a floor reduces the cost of buying the cap.
• D) Dealers won't sell a cap without also dealing with the floor to limit their own risk.
• E) It is not a complete hedge without both positions.

---

Definitions:

Δ Stockholders' Equity

The change in the total value of a company's equity over a specific period, influenced by earnings, dividends, and stock issues.

Financing Activities

Transactions and events where a company generates or repays capital to finance its operations.

Comparative Balance Sheets

Financial statements that present the assets, liabilities, and equity of an entity at different points in time for comparison.

Cash Flows

Represents the total amount of money being transferred into and out of a business, especially as affecting liquidity.