Question: Assume that you bought an interest rate cap on three- month LIBOR with a 2.50 percent strike rate. The current rate for three- month LIBOR

Assume that you bought an interest rate cap on three- month LIBOR with a 2.50 percent strike rate. The current rate for three- month LIBOR is 2.28 percent.
a. What will happen to the premium (value) on this cap if LIBOR rises to 3.16 percent? Explain.
b. What will happen to the premium (value) on this cap if LIBOR falls to 2.10 percent? Explain.

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