Suppose You Want to Hedge the Cap with the Swap

question 15

Short Answer

Suppose you want to hedge the cap with the swap, what is the hedge ratio?

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Definitions:

Government Intervention

Actions taken by the government to influence or regulate various activities and outcomes in the economy, such as setting taxes, subsidies, regulations, and price controls.

Marginal Private Benefit

The surplus value that consumers or producers get from buying or making an extra unit of a good or service.

Marginal Private Cost

Marginal private cost is the cost that a producer incurs in making an additional unit of a good or service, excluding any external costs.

Socially Optimal

A state in which resources are allocated in the most efficient and equitable manner from a societal perspective.