A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates), where payments are paid or received at the end of years 2 and 3 as shown below:

End of Year:	0	1	2	3
Cash Flow at end of the year:	-	-	x	x

Instead of a cap, if the bank had purchased a 3-year 6 percent floor and interest rates are 5 percent and 6 percent in years 2 and 3, respectively, what are the payoffs to the bank?

		The bank will receive $0 at the end of year 2 and receive $50,000 at the end of year 3.
		The bank will receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3.
		The bank will receive $0 at the end of year 2 and pay $50,000 at the end of year 3.
		The bank will receive $50,000 at the end of year 2 and pay $0 at the end of year 3.
		The bank will receive $50,000 at the end of year 2 and pay $50,000 at the end of year 3.

Answer rating: 100% (QA)

Ans is receive 50000 at the end of year 2 and receive 50000 at the end of yea... View the full answer