A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates),

where payments are paid or received at the end of year 2 and 3 as shown below:

In addition to purchasing the cap, if the bank also sells a 3-year 6 percent floor and

interest rates are 5 percent and 7 percent in years 2 and 3, respectively, what are the

payoffs to the bank? Specifically, the bankwill

A) receive $50,000 at the end of year 2 and pay $0 at the end of year 3.

B) receive $0 at the end of year 2 and pay $50,000 at the end of year 3.

C) receive $0 at the end of year 2 and $50,000 at the end of year 3.

D) receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3.

E) pay $50,000 at the end of year 2 and receive $50,000 at the end of year 3.