CAF-7 · Chapter 10 · Question 14 of 15
If a company purchases a Call option on an interest rate (an Interest Rate Cap), what protection does the company secure?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) It guarantees a maximum rate of interest paid on its borrowings
Explanation
An interest rate Call option (Cap) gives a borrower the right to cap their interest rate. If market rates rise above the strike rate, the option pays out, effectively guaranteeing a maximum limit to their borrowing costs.
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