Question #109
Reading: Reading 31 Valuation of Contingent Claims
PDF File: Reading 31 Valuation of Contingent Claims.pdf
Page: 51
Status: Unattempted
Correct Answer: B
Question
Which of the following best describes an interest rate cap? An interest rate cap is a package or portfolio of interest rate options that provide a positive payoff to the buyer if the:
Answer Choices:
A. T-Bond futures exceeds the strike price
B. reference rate exceeds the strike rate
C. reference rate is below the strike rate
Explanation
An interest rate cap is a package of European-type call options (called caplets) on a
reference interest rate.