ap0258

janakisri Wrote:
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> It does not say if you are long or short the
> bond.
>
> The collar protects against rising interest rates
> ( fueled by the premium on the floor of the
> collar)
>
> The short position on the bond protects against
> falling interest rates . as the NY show pointed
> out earlier a floating rate bond is a position on
> the interest rates , so a short bond is a short
> position on interest rates.
>
> What you're left with , is a constant spread i.e.
> a fixed rate bond


I understand what you're saying, I think. The Secret Sauce basically sums it up as the following:

Purchase cap and sell floor to hedge a floating rate liability.

Purchase a floor and sell a cap to hedge a floating rate asset.

So under the example posted above, we have to assume the floating rate bond is a floating rate liability since he purchased a cap and shorted the floor.

NO EXCUSES