A borrower with floating rate loan may buy a cap for protoection against rates above the cap.
and sell a floor in order to defray some of the cost of the cap
I don’t understand the second statement.
can someone explain in simple language?
My question is, why would a floating rate borrower want to put a floor? Sounds kind of illogical to me.
This is an interest rate collar. To pay for the protection from the downside of rising interest rates, the borrower is giving up some of the upside benefit from decreasing interest rates. All the borrower is doing is making a tradeoff.