Question #69
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 31
Status: Unattempted
Correct Answer: A
Question
A floor on a floating rate note, from the bondholder's perspective, is equivalent to:
Answer Choices:
A. owning a series of puts on fixed income securities
B. writing a series of interest rate puts
C. owning a series of calls on fixed income securities
Explanation
A floor, which puts a minimum on floating rate interest payments is equivalent to owning
calls on fixed income securities which will pay when interest rates fall. Owning interest
rate puts, rather than writing them, would be equivalent to the floor. Puts on fixed income
securities pay when interest rates increase.