Assume a Binomial Pricing Model Where There Is an Equal

question 8

Multiple Choice

Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year. What should be the net price of a $5,000,000 collar if the bank purchases a three-year 6 percent cap and sells a 5 percent floor, if the current (spot) rates are 6 percent?

• A)The bank will receive net $2,010.
• B)The bank will receive net $31,651.
• C)The bank will pay net $31,651.
• D)The bank will pay net $2,010.
• E)price = $0

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Definitions:

Articles Of Incorporation

The document that is filed with the appropriate state official, usually the secretary of state, when a business is incorporated and that contains basic information about the corporation.

Registered Office

The official address of a company or organization, registered with the appropriate legal authorities, where official documents are sent.

Good Faith

A principle that emphasizes honesty, fairness, and sincerity in the execution of obligations or dealings.

Defect In Incorporation

Errors or omissions that occur during the process of forming a corporation, which could affect the entity's legal status.