Caps, Floors and Collars: ONLY THE LAST QUESTION PLEASE

An FI has purchased a $200 million cap of 9% at a premium of 0.65% of face value. A $200 million floor of 4% is also available at a premium of 0.69% of face value. (a) If interest rates rise to 10%, what is the amount received by the FI? What are the net savings after deducting the premium? (b) If the FI also purchases a floor, what are the net savings if interest rates rise to 11%? What are the net savings if interest rates fall to 3%? (c) If, instead, the FI sells (writes) the floor, what are the net savings if interest rates rise to 11%? What if they fall to 3%? (d) What amount of floors should the FI sell in order to compensate for its purchases of caps, given the above premiums?

The answers for questions a, b, c are the following

a) Interest rate rise Amount receive $2,000,000 Net saving $700,000.00 10% premium $1,300,000.00 11% b) floor Interest rate rise Premium floor $1,380,000.00 Total premium $2,680,000.00 Amount receive $4,000,000 Net saving $1,320,000.00 Interest rate fall 3% Amount received $2,000,000 Net savings ($680,000.00) Interest rate f ant rece sells floor Interest rate rise 11% premium receiv $1,380,000.00 premium receiv $80,000.00 amount cap pur $4,000,000 Net savings $4,080,000.00 3% $2,000,000 $2,080,000.00 net saving a) Interest rate rise Amount receive $2,000,000 Net saving $700,000.00 10% premium $1,300,000.00 11% b) floor Interest rate rise Premium floor $1,380,000.00 Total premium $2,680,000.00 Amount receive $4,000,000 Net saving $1,320,000.00 Interest rate fall 3% Amount received $2,000,000 Net savings ($680,000.00) Interest rate f ant rece sells floor Interest rate rise 11% premium receiv $1,380,000.00 premium receiv $80,000.00 amount cap pur $4,000,000 Net savings $4,080,000.00 3% $2,000,000 $2,080,000.00 net saving