Question
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
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 3 percent of notional principal valued at $90 million with an interest rate ceiling of 8 percent. The interest rate floor specifies a fee of 3 percent of notional principal valued at $90 million and an interest rate floor of 8 percent.
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