. Draw a figure that reflects a firm with an interest rate collar with a...
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Finance
. Draw a figure that reflects a firm with an interest rate collar with a floor of 2% (with a premium of 25 basis points) and a 5% ceiling or cap (with a premium of 50 basis points). Show where the strike price would be for the cap and floor on the X-axis. A. If the firm has a variable rate bank loan of $1M with a current market interest rate of 4% and expects interest rates to rise, should it buy a floor and sell a cap or vice versa to reduce its interest rate risk? Why? B. What is the benefit to the firm of setting up an interest rate collar rather than just having a floor or a cap by itself? C. If market rates rise to 6%, what happens? What happens if market rates fall to 2.5%?
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