Assume two exercise dates at the end of year 2 and the end of year 3. Suppose the FI buys a floor of 4 percent at time 0. The binomial tree suggests that rates at the end of year 2 could be 3 percent (p .5) or 5 percent (p .5) and at the end of year 3 rates could be 2 percent (p .25), 4 percent (p .5), or 6 percent (p .25). Calculate the fair value of the floor premium. Assume the notional face value of the floor is

$100 million. ($924,400) LO.1