A client is interested in buying a cap on interest rates to protect their assets against rising interest rates. The cap they are looking at is an option that expires in 5 years. It can only be exercised at the end of 5 years that is, it is European style. The underlying rate that it is based upon in the 10-year United States Treasury rate. Its strike is 4%. So for 100mm in notional, its payoff will be 100mm x max (10-year Treasury 4%,0). IE, 5% rates will pay off 1mm. The cost is 3 bps (= $30,000).

Use both an inside and outside view to assess whether this is good value. By good value, is the expected payoff> the cost?