Assume a Binomial Pricing Model Where There Is an Equal

question 109

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:

Functional Theory

A theoretical perspective that analyzes society in terms of the functions performed by its different components or institutions.

Stratification

The hierarchical arrangement or classification of society based on various factors such as wealth, race, education, or power.

Cultural Objects

Physical items or symbols that hold particular meaning within a culture, such as art, tools, flags, or clothing.

Good Taste

The ability to make discerning judgments about aesthetic and cultural values, often considered subjective and influenced by social norms.