An FI has purchased a $200 million cap of 9 percent at a premium of 0.65 percent
Question:
a. If interest rates rise to 10 percent, what is the amount received by the FI? What are the net savings after deducting the premium?
b. If the FI also purchases a floor, what are the net savings if interest rates rise to 11 percent? What are the net savings if interest rates fall to 3 percent?
c. If, instead, the FI sells (writes) the floor, what are the net savings if interest rates rise to 11 percent? What if they fall to 3 percent?
d. What amount of floors should the FI sell in order to compensate for its purchases of caps, given the above premiums?
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Related Book For
Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders
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