1. Assume two exercise dates at the end of year 1 and the end of year 2. Suppose the FI buys a floor of 4 percent at time 0. The binomial tree suggests that rates at the end of year 1 could be 3 percent (p  .5) or 5 percent (p  .5) and at the end of year 2 rates could be 2 percent (p  .25), 4 percent (p  .5), or 6 percent (p  .25). Calculate the fair value of the floor premium. Assume the one-year discount rates for payments in years 0, 1, and 2 are 9 percent, 10 percent, and 11 percent, respectively. ($792,700)

An FI buys a $100 million cap at a premium of .75 percent and sells a floor at a .85 percent premium. What size floor should be sold so that the net cost of the cap purchase is zero? ($88,235,394)