Accounting for Investments, Volume 2: Fixed Income Securities and Interest Rate Derivatives—A Practitioner's Guide

QUESTIONS

Theory questions

1. What is the meaning of an interest rate collar instrument?

2. Explain the benefits of an interest rate collar instrument?

3. What are the risks associated with an interest rate collar instrument?

4. What are the significant events in the trade life cycle of an interest rate collar instrument?

5. What is the meaning of an interest rate reverse collar instrument?

6. Can an interest rate collar instrument be designated as a hedging instrument?

Objective questions

1. An interest rate _________ is an instrument that gives you protection against rising rates by guaranteeing that you will never pay above a pre-agreed rate, but at the same time sets a downside (floor) rate below which you cannot benefit if rates do fall further.

a) Cap

b) Floor

c) Collar

d) None of the above

2. An interest rate collar protects you against increases in interest rates beyond a predetermined level known as the __________.

a) Floor rate

b) Cap rate

c) Average rate

d) None of the above

3. An interest rate collar provides known upside protection against a rise in rates with the potential to benefit from a fall in rates, down to a ____________.

a) Post-agreed level

b) Agreed level

c) Pre-agreed level

d) None of the above

4. A collar protects a company against adverse movement in ____________.

a) Exchange rate

b) Bank rate

c) Interest rate

d) None of the above

5. While recording the trade contingent, since an interest rate collar agreement is a notional amount and no physical ...