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Assume that the Bank of Topeka anticipates that interest rates will increase over the next several years and decides to hedge the interest rate
Assume that the Bank of Topeka anticipates that interest rates will increase over the next several years and decides to hedge the interest rate risk on its portfolios by purchasing a three-year interest rate collar, which uses LIBOR as the index used to represent the prevailing interest rate. The interest rate cap specifies a fee of 6 percent of notional principal valued at $80 million with an interest rate ceiling of 7 percent. The interest rate floor specifies a fee of 6 percent of notional principal valued at $80 million and an interest rate floor of 8 percent. Given this information, fill in the table that follows. Information Purchase of Interest Rate Cap LIBOR Interest Rate Ceiling LIBOR's Percent above the Ceiling Payments Received Fee Paid $ Sale of Interest Rate Floor Interest Rate Floor LIBOR's Percent below the Floor Payments Made Fee Received End of Year 0 1 2 3 5% 9% 12% 7% 7% 7% 0% 2% 5% 8% 8% 8% 3% 0% 0% $ Given the information filled out in the table, the Bank of Topeka's profit form the transaction after the three-year period is $
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