Use the following information to price a three-year collar by purchasing an in-the-money cap and writing an out-of-the-money floor. Assume a binomial options pricing model with an equal probability of interest rates increasing 2 percent or decreasing 2 percent per year. Current rates are 7 percent, the cap rate is 7 percent, and the floor rate is 4 percent. The notional value is $1 million. All interest payments are annual payments as a percent of notional value, and all payments are made at the end of year 2 and the end of year 3.
7% Cap Valuation

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E2 (beg 2 (end 3(beg) 3 (end) t- 1 11%(0.25) 7% (0.50) 3% 0.25) $40,000 9%(0.50) $20,000 7% spot SO 590/(0.50) S0