cap and floor question:1.It is December, 2018. Bank X has a 1-year maturity fixed rate loan at LIBOR+2. The bank wants to earn an interest rate spread of at least 1%, annualized, after inclusion of premiums. The loan is financed with three-month deposits at LIBOR. The first 3-month spot rate is 6%; the second 3-month spot rate is 7%; the third 3-month spot rate is 8%; the fourth 3-month spot rate is 9%;

a.The bank is considering a cap or a floor. Which should it use? What is the rate the bank wants on the option?

b.If the premium on caps and floors is 1% on an annualized basis, what will net income be for the year, if interest rates change as follows: the three-month spot rate in September, 2018 is 7%; the three-month spot rate in December, 2018 is 12%; and the three-month spot rate in March, 2019 is 4%.