d. define interest rate caps, floors, and collars;
A combination of interest rate calls designed to protect a borrower in a floating rate loan against increases in interest rates is called an interest rate cap.
A combination of interest rate puts designed to protect a lender in a floating rate loan against decreases in interest rates is called an interest rate floor.
A combination of long cap and short floor is called an interest rate collar. The collars are most often used by borrowers and consist of long position in a cap, financed by selling a short position in a floor.
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