Which of the Below Statements Is FALSE

question 5

Multiple Choice

Which of the below statements is FALSE?

• A) In an interest rate cap and floor, the buyer pays an upfront fee, which represents the maximum amount the buyer can lose and the maximum amount the writer of the agreement can gain.
• B) The seller (writer) of an interest rate cap benefits if the underlying interest rate rises above the strike rate because the buyer must compensate the buyer.
• C) In essence, interest rate caps and interest rate floors contracts are equivalent to a package of interest rate options.
• D) The buyer of an interest rate floor benefits if the interest rate falls below the strike rate because the seller (writer) must compensate the buyer.

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Definitions:

Average Rate

The mean value derived from dividing the sum of multiple rates by the number of rates, often used in financial and statistical calculations.

Capital Investment

Capital investment refers to funds invested in a business venture with the expectation of using the capital assets to generate future profits.

Present Value

This refers to the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Future Cash Flows

The estimated amounts of money expected to be received or paid out in the future as a result of business operations or investments.