waldziuchna

> However, this does not make sense to me: "…short
> floor is called a collar and offers downside
> protection at the cost of a sacrifice of upside."
> If she writes a floor then she is only helping to
> offset some of her costs for the long cap - if the
> rates go below the floor then she will need to
> pay. I fail to understand how this is a downside
> protection?

downside in this case is the interest rates going UP and upside here is interest rates coming down on someone who is paying a variable rate loan. So a collar caps the upside ( when the rates going down) but offers downside protection(when the rates go up).