In: Finance
An FI has purchased a $211 million cap of 8 percent at a premium
of 0.60 percent of face value. A $211 million floor of 5.1 percent
is also available at a premium of .65 percent of face value.
a. If interest rates rise to 9 percent, what is
the amount received by the FI? What are the net savings after
deducting the premium?
b. If the FI also purchases a floor, what are the
net savings if interest rates rise to 10 percent? What are the net
savings if interest rates fall to 4.1 percent? (Negative
amounts should be indicated by a minus sign.)
c. If, instead, the FI sells (writes) the floor,
what are the net savings if interest rates rise to 10 percent? What
if they fall to 4.1 percent? (Negative amounts should be
indicated by a minus sign.)