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Why Might a Bank That Has Purchased a Cap Also

Question 62

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Why might a bank that has purchased a cap also wish to also sell a floor?


A) By themselves, caps are ineffective at limiting changes in a bank's cost of funds in a desirable way.
B) Regulators require one to be used with the other.
C) Selling a floor reduces the cost of buying the cap.
D) Dealers won't sell a cap without also dealing with the floor to limit their own risk.
E) It is not a complete hedge without both positions.

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