1. Use the following information to price a three-year collar by purchasing an out-of-the-money cap and writing an in-the-money floor. Assume a binomial options pricing model with an equal probability of interest rates increasing 2 percent or decreasing 2 percent per year. Current rates are 4 percent, the cap rate is 7 percent, and the floor rate is 4 percent. The notional value is $1 million. All interest payments are annual payments as a percent of notional value, and all payments are made at the end of year 1 and the end of year 2.

Contrast the total cash flows associated with the collar position in question 34 against the collar in question 35. Do the goals of FIs that utilize the collar in question 34 differ from those that put on the collar in question 35? If so, how?