Question #19 - Reading 31 Valuation of Contingent Claims

Reading: Reading 31 Valuation of Contingent Claims

PDF File: Reading 31 Valuation of Contingent Claims.pdf

Page: 10

Status: Unattempted

Correct Answer: A

Shared Context

- Williamson is very interested in the total return swap. He asks Potter how much it would cost to enter into this transaction. Which of the following is the most likely cost of the swap at inception? A) $45,007. B) $0. C) $340,885.

Question

Potter is now considering some of the bank's floating rate assets. Which of the following transactions is the most appropriate to minimize the interest rate risk of these assets without sacrificing upside gains?

Answer Choices:

A. Buy a floor

B. Buy a cap

C. Buy a collar

Explanation

Buying a floor combined with a floating rate assets limits the exposure to interest rate decreases (i.e., no exposure to interest rate decreases below strike rate) while the floating rate holder is still able to benefit from interest rate increases. Ideally, Potter should consider matching the bank's asset position against the bank's liability position.

Actions

Practice Flashcards