Suppose Libor Caps and Floors at the Same Strike Rate

question 1

Multiple Choice

Suppose Libor caps and floors at the same strike rate are unequal in price. Suppose that, ceteris paribus, there is a sudden increase in interest-rate volatility. Which of the following statements is valid?

• A) Caps and floors will increase in value, but caps will increase by more than floors.
• B) Caps and floors will increase by the same amount.
• C) Caps and floors will increase in value, but caps will increase by less than floors.
• D) There is insufficient information to determine the answer.

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Definitions:

Defective Condition Warranty

A guarantee that a product will function as intended and be free of defects that could make it unsafe or unfit for its usual purpose.

Consumer Expectations Test

A legal standard used to determine product liability based on whether a product fails to meet the ordinary expectations of a consumer.

Product Defect

A flaw or fault in a product that could make it dangerous or fail to perform its intended purpose.

Ordinary Consumer

An average or typical user of goods or services, used as a standard in legal settings for consumer protection.