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

question 20

Multiple Choice

A floating-rate borrower 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:

Standard Deviation

A measure that quantifies the amount of variation or dispersion of a set of data values from the mean value.

Standard Deviation

A quantification of the range or diversity in a dataset, illustrating the difference of the numbers from their mean value.

Mean

The average of a set of numbers, calculated by adding them together and dividing by the count of numbers.

Sample Variance

A measure of variability within a sample dataset, calculated by taking the sum of squared differences from the mean divided by the number of observations minus one.