A Company Buys a Caplet Today (Time 0)with Maturity T

question 9

Multiple Choice

A company buys a caplet today (time 0) with maturity T = 1 year and a strike rate of k = 3 percent on a notional of L_N = $200 million.Suppose the six-month bbalibor rate realized after one year is 4.5 percent.Assume that there are 181 days in this six-month period and the year has 365 days.
-Suppose that after one year,the price of a zero-coupon bond that matures after six months is worth $0.9780.The caplet's payoff after one year is:

• A) $1,454,942
• B) $1,470,000
• C) $1,487,671
• D) $1,500,000
• E) None of these answers are correct.

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Definitions:

Anticipated Rate of Growth

The expected annual increase in a company's revenue or profit, often expressed as a percentage.

Financial Leverage

The use of borrowed funds with a fixed cost to finance the assets of the business to increase the potential return to shareholders.

Planned Activities

Scheduled actions or tasks outlined by an organization or individual aimed at achieving specific goals.

Retention Ratio

The proportion of net income that is retained by a company rather than distributed to its shareholders as dividends.