The company could use interest rate options to set a floor to manage its interest rate risk this Statment Is True Or False?
Question
The company could use interest rate options to set a floor to manage its interest rate risk this Statment Is True Or False?
Solution
The statement is True. The company could use interest rate options, specifically interest rate floor options, to manage its interest rate risk. An interest rate floor is a series of European put options or floorlets on a specified reference rate, usually LIBOR. The buyer of the floor receives money if on the maturity of any floorlet, the reference rate is below the agreed strike price of the floor. This strategy sets a minimum (or floor) on the interest rates, thus protecting the company against falling interest rates.
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