An FI has purchased a $200 million cap of 9 percent at a premium of 0.65 percent of face value. A $200 million floor of 4 percent is also available at a premium of 0.69 percent of face value. (LG 10-8)

a. If interest rates rise to 10 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 11 percent? What are the net savings if interest rates fall to 3 percent?

c. If, instead, the FI sells (writes) the floor, what are the net savings if interest rates rise to 11 percent? What if they fall to 3 percent?

 LO.1