Question 2

Nikki recently took out a loan from her bank at a floating rate of interest (which is currently 5.5% per annum). Nikki has today purchased from Glant Bank a collar option ( 4.5% to 6% per annum) to hedge her risk in relation to the interest rate on this loan for the next year. What happens if (in the next year) the floating rate of interest on the loan is 3.5% ? Nikkl pays 1% to Giant Bank Nikki recelves 1% from Giant Bank Nikki pays 2.5% to Glant Bank Nikki receives 2.5% from Glant Bank