An FI has purchased a $204 million cap of 9 percent at a premium of 0.85 percent
Question:
An FI has purchased a $204 million cap of 9 percent at a premium of 0.85 percent of face value. A $204 million floor of 4.4 percent is also available at a premium of .90 percent of face value.
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 3.4 percent? (Negative amounts should be indicated by a minus sign.)
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 3.4 percent? (Negative amounts should be indicated by a minus sign.)
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Financial Institutions Management A Risk Management Approach
ISBN: 978-0071051590
8th edition
Authors: Marcia Cornett, Patricia McGraw, Anthony Saunders