A Floating-Rate Lender Wants to Use a Collar as a Hedge

question 1

Multiple Choice

A floating-rate lender wants to use a collar as a hedge. Which of the following is appropriate?

• A) Buy a cap and sell a floor
• B) Buy a cap and buy a floor
• C) Sell a cap and sell a floor
• D) Sell a cap and buy a floor

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Definitions:

Fundamental Investors

Investors who analyze a company’s financial fundamentals, such as earnings, revenues, and assets, before making investment decisions, typically with a long-term perspective.

Undervalued Stocks

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Cost Of Capital

The rate of return that a company must pay to its creditors and shareholders for the use of their funds.

Financial Reports

Official documents containing financial data about a company, including balance sheets, income statements, and cash flow statements.