The 4%-Strike Six-Month Libor-Based Two-Year Cap and Floor Are Trading $- \$ 0.25$

question 32

Multiple Choice

The 4%-strike six-month Libor-based two-year cap and floor are trading at $2.30 and $2.55,respectively.Assume that the cap has 4 caplets maturing in 6 months,1 year,18 months,and 24 months,respectively,and that the floor similarly has 4 floorlets.What is the NPV at inception of a two-year swap in which you are paying Libor versus receiving 4%?

• A) \(- \$ 0.25\)
• B)$0
• C)$0.25
• D)There is not enough information to determine the price of the swap.

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Definitions:

Cost Of Goods Sold

Direct costs attributable to the production of the goods sold by a company, including material and labor costs.

Total Quality Management

A management approach focused on improving the quality of an organization's outputs, including goods and services, through continual feedback and improvements.

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A performance standard aiming for no defects in the production process to enhance product quality.

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Goods that have completed the manufacturing process and are ready to be sold to customers.