A Bank Purchases a 3-Year,6 Percent $5 Million Cap (Call $\begin{array}{lllll}\text { End of Year: } & 0 & 1 & 2 & 3 \\\text { Cash Flow at end of year: }&- & - & x & x \\\hline\end{array}$

question 48

Multiple Choice

A bank purchases a 3-year,6 percent $5 million cap (call options on interest rates) ,where payments are paid or received at the end of year 2 and 3 as shown below:

$\begin{array}{lllll}\text { End of Year: } & 0 & 1 & 2 & 3 \\\text { Cash Flow at end of year: }&- & - & x & x \\\hline\end{array}$

Instead of a cap,if the bank had purchased a 3-year 6 percent floor and interest rates are 5 percent and 6 percent in years 2 and 3,respectively,what are the payoffs to the bank?

• A)The bank will receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3.
• B)The bank will receive $50,000 at the end of year 2 and pay $50,000 at the end of year 3.
• C)The bank will receive $0 at the end of year 2 and pay $50,000 at the end of year 3.
• D)The bank will receive $0 at the end of year 2 and receive $50,000 at the end of year 3.
• E)The bank will receive $50,000 at the end of year 2 and pay $0 at the end of year 3.

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