Your bank is asset sensitive, and management wants to protect against loss from interest rate changes. a.

Question:

Your bank is asset sensitive, and management wants to protect against loss from interest rate changes.
a. Would an interest rate cap or floor serve as a better hedge? Explain.
b. Would a collar or reverse collar serve as a better hedge? Explain.
c. Why would the bank choose a collar or reverse collar over a cap or floor, respectively? Explain.