Assume that First South- Western enters into an interest rate collar. It buys an interest rate cap like that described in question 16 and simultaneously sells an interest rate fl oor to West Capital that has the following characteristics: two- year,

$20 million interest rate fl oor, settled once a year.

The strike rate is 3 percent. The premium is 2 percent of the principal amount. The interest rate 1 year from now is 7 percent and 2 years from now is 4 percent. How much will First South-

Western pay for these contracts? How much will First South- Western receive in years 1 and 2?