A collared floater is like a variable rate bond, but with an upper limit and a lower limit on the rate of coupon payment. Consider, for example, annual rates coupon payment and one-year spot interest rates. In the following table, the current one-year spot interest rate is denoted by r in column (1). Depending on the current spot interest rate, the collared floater with a face value of F1 dollars will pay the holder of this floater a sum a year later, as given in column (2) of the table. The binomial tree below gives the evolution of one-year spot interest rates over a four year period. F1 = 880; F2 = 44; F3 = 70.4 22. What is the current fair value of the four-year collared floater if the risk-neutral probabilities in the binomial tree are 0.5 and 0.5 for the up and down moves, respectively?

Current Rate, r Collared Floater with face value F1 pays at the end of the year r 8% F2 F3 10.50% 8.75% 6.2% 9.50% 4.5% 6.00% 5.2% 6.25% 5.50% 4.75% Current Rate, r Collared Floater with face value F1 pays at the end of the year r 8% F2 F3 10.50% 8.75% 6.2% 9.50% 4.5% 6.00% 5.2% 6.25% 5.50% 4.75%