Asked by Antoine Miquel on May 28, 2024
Verified
The Falkland Cheese Company has a variable rate loan with an interest rate collar. The company is assured that the interest rate will:
A) Not increase above a stated rate and will decrease in direct proportion to changes in the discount rate.
B) Both increase and decrease in direct proportion to changes in the discount rate.
C) Increase in direct proportion to changes in the discount rate but remain above a stated rate.
D) Not increase above a stated rate nor fall below a stated rate.
E) Never change from the initial rate.
Interest Rate Collar
A financial derivative strategy used to limit the range of possible interest rates movements by buying and selling interest rate options.
Variable Rate Loan
A loan where the interest rate can fluctuate over time based on changes in an underlying benchmark interest rate or index.
Discount Rate
The interest rate used to determine the present value of future cash flows.
- Grasp the concept of hedging strategies and their applications in financial risk management.
Verified Answer
AF
Ashlee FendallJun 02, 2024
Final Answer :
D
Explanation :
An interest rate collar is a financial derivative that companies use to hedge against interest rate fluctuations. It sets both a maximum (cap) and a minimum (floor) interest rate. This ensures that the interest rate on a variable rate loan will not increase above the cap or fall below the floor, as described in option D.
Learning Objectives
- Grasp the concept of hedging strategies and their applications in financial risk management.