Suppose you are a corporate Treasurer and you need to finance a $100 investment with a borrowing for 5 years.

Your choices are a floating rate loan at the default free spot rate, currently at 0.01, or a fixed rate loan at .03.

There are trading caps and floors of any maturity and notional desired in the market. Youve looked at your cash flows and you cannot afford to pay the .03 fixed rate loan.

You can afford the .01 floating rate loan today. But, if interest rates rise above .025 before the 5 years is out, you would not be able to pay the interest. You can pay at most .025.

Is there any way the Treasurer can finance this investment of $100, by borrowing only $100, given the available traded securities being certain that she will never pay more than .025? Explain.