An investor purchases a cap on 12/31/16 for an initial premium of 0.75% of the notional amount.
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Question:
An investor purchases a cap on 12/31/16 for an initial premium of 0.75% of the notional amount. The terms of the cap include the following:
(i) the notional amount is $10 million;
(2) the reference rate is 3-month LIBOR;
(3) the maturity of the contract is 1 year;
(4) cap payments are made quarterly;
(5) the strike price is 2.500%; and
(6) the payment is based on an actual/360 day count. LIBOR for the 3/31/17, 6/30/17, 9/30/17 and 12/31/17 LIBOR reset dates is 1.7575%, 2.2825%, 2.7175% and 3.1250%, respectively.
(a) What is the amount of the initial premium payment? Which party pays?
(b) What is the amount of each cap payment? Which party pays?
Related Book For
Fundamentals of Investment Management
ISBN: 978-0078034626
10th edition
Authors: Geoffrey Hirt, Stanley Block
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