Interest rate floor question, equivalent, interest, pretty

atate2007

here's a question from schweser:

an interest rate floor on a floating-rate note (from the issuer's perspective) is equivalent to a series of:

A) long interest rate puts
B) short interest rate puts
C) short interest rate calls

the answer's B, but I'm pretty sure it's A. Any thoughts on this?

mnieman

When you see short think selling and when you see long think buying (generally speaking). So the issuer is selling a put to the purchaser therefore the issuer is in a short position on a put; interest rate floor. From the Buyers perspective; the buyer is long on a put (interest rate floor).

leadcfa

Yup, B. nice n easy explanation too. Thanks, Zesty

dcfox83

another way to think about this is to think about who benefits from the floor.

if the floor is at 2% and rates are at 1%, the floor kicks in and the receiver gets 2%.

the issuer is worse off and would never exercise a long put or call that puts them in a worse position, so it has to be a short.

waldziuchna

well said homie