PRMIA Exam 8006 Topic 9 Question 48 Discussion

The buyer of a cap who is primarily interested in protecting against a rise in interest rates and does not mind losing some of the gains if interest rates were to fall can reduce her costs by selling a floor with a lower strike rate. Selling a cap would further expose her to the risk of rising rates, exactly what she is trying to protect herself against, and reducing the strike rate for the cap will actually increase the cost of the cap. Similarly, increasing the time period to which the cap applies will also increase the cost of the cap.