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Exercise 2 Set up a zero-cost collar for one quarterly period. Assume the following: LIBOR is flat at 4% Option maturity is 1 year One

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Exercise 2 Set up a zero-cost collar for one quarterly period. Assume the following: LIBOR is flat at 4% Option maturity is 1 year One caplet and floorlet with quarterly duration Interest rate cap is set at 6% Volatility is 20% (Black volatility) Notional is $1 What is the value of the cap? What is the floor strike such that the collar is zero value? Exercise 2 Set up a zero-cost collar for one quarterly period. Assume the following: LIBOR is flat at 4% Option maturity is 1 year One caplet and floorlet with quarterly duration Interest rate cap is set at 6% Volatility is 20% (Black volatility) Notional is $1 What is the value of the cap? What is the floor strike such that the collar is zero value

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