(b) (i) An SME has a variable rate loan from a Bank with rolling quarterly Interest...
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(b) (i) An SME has a variable rate loan from a Bank with rolling quarterly Interest Payments of Libor + 3.5%. To protect against excessive rates the Investment wing of the Bank, sells the SME an interest cap at 4% using a series of European Style 3 month Interest Rate Put Options at the Exercise Price of 96.00. Explain how this arrangement provides the SME with a cap of 4% on it floating interest rates payments. [4] The Investment Bank offers to buy corresponding Call Options from the SME. Give one advantage and one disadvantage in the SME writing these Call options. [2] (b) (i) An SME has a variable rate loan from a Bank with rolling quarterly Interest Payments of Libor + 3.5%. To protect against excessive rates the Investment wing of the Bank, sells the SME an interest cap at 4% using a series of European Style 3 month Interest Rate Put Options at the Exercise Price of 96.00. Explain how this arrangement provides the SME with a cap of 4% on it floating interest rates payments. [4] The Investment Bank offers to buy corresponding Call Options from the SME. Give one advantage and one disadvantage in the SME writing these Call options. [2]
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i This arrangement provides the SME with a cap of 4 on its floating interest rate payments through the use of European Style 3month Interest Rate Put ... View the full answer
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