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:

Contrarian Approach

An investment strategy that involves going against prevailing market trends or sentiments, buying underperforming assets, and selling when they perform well.

Abnormal Returns

Returns on a security that exceed or fall below what is anticipated based on market or model predictions, often attributed to unexpected events.

Macroeconomic Event

A large-scale economic occurrence affecting the economy as a whole, such as inflation, unemployment, or a recession.

Market Decline

A period in which stock prices fall across the majority of the market, often leading to a decrease in investor confidence.