Exhibit 23.8 USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 87

Multiple Choice

Exhibit 23.8
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
An international investment firm buys an interest rate cap that pays the difference between LIBOR and 6% if LIBOR exceeds 6%. Current LIBOR is 5%. The amount of the option is $1,500,000, and the settlement is every 3 months. Assume a 360 day year.
-Refer to Exhibit 23.8. Find the payoff if LIBOR closes at 4.7%.

• A)-$45,000
• B)-$11,250
• C)$0
• D)$11,250
• E)$45,000

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Definitions:

Purchasing Power

The real value of money, defining how much goods or services a unit of currency can buy, often influenced by inflation.

Price

The price tag attached to purchasing a good or service.

Consumer's Income

The total amount of money earned by a consumer, determining their purchasing power and affecting their demand for goods and services.

Corner Solution

In optimization problems, a situation where the optimal choice for a variable is at the limit or bound of its possible values, rather than in the interior of the choice set.