Use the following information to price a three-year collar by purchasing an in-the-money cap and writing an out-of-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 7 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 2 and the end of year 3.