A floor, which puts a minimum on floating rate interest payments is equivalent to owning calls on fixed income securities which will pay when interest rates fall.
I do not seem to get this. Shouldnt this be equivalent to owning puts ? You get paid when the interest rate goes down from say 4% ( your floor) to 2%(current interest rate). Instead of getting paid at 2% you get paid at 4% ? This is equivalent of a put right ? how come they say its equivalent of “owning a call”.
I do not seem to get this. Shouldnt this be equivalent to owning puts ? You get paid when the interest rate goes down from say 4% ( your floor) to 2%(current interest rate). Instead of getting paid at 2% you get paid at 4% ? This is equivalent of a put right ? how come they say its equivalent of “owning a call”.