An FI has purchased a $200 million cap of 9 percent at a premium of 0.65 percent

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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 24-4)

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?

d. What amount of floors should the FI sell in order to compensate for its purchase of caps, given the above premiums?

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ISE Financial Markets And Institutions

ISBN: 9781265561437

8th International Edition

Authors: Anthony Saunders, Marcia Cornett, Otgo Erhemjamts

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