Schweser Qbank question #88531
Context: A floating rate bond with
Dollar value = $30million
Spread over LIBOR = 0.50%
Time to Maturity = 1 year
Cap strike rate = 6%
Floor strike rate = 5%
Interest payments
Part 2) Miller asks Johnson to hedge a hypothetical short position in above floating rate bond. Which of the following is the best hedge for this position?
A) Sell an interest rate cap
B) Buy an interest rate floor
C) Buy an interest rate cap
Your answer: B was incorrect. The correct answer was C) Buy an interest rate cap.
An interest rate cap provides a positive payoff when interest rates are above the cap strike rate. Therefore, the buyer of this instrument is able to hedge himself against rising interest rates.
Incorrect answer explanations:
Selling an interest rate cap is not a hedge against rising interest rates.
Buying an interest rate floor hedges the risk of decreasing interest rates
I dont understand. Doesn’t a SHORT position in a floating rate bond mean I am receiving floating rate payments and hence would want to hedge against decreasing interest rates? Or am I overthinking this?? |
发表于 2013-4-3 06:41
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