Refer to the Following Information

question 6

Multiple Choice

Refer to the following information. A company buys an interest rate cap that pays the difference between LIBOR and 8% if LIBOR exceeds 8%. Current LIBOR is 7%. The amount of the option is €2 500 000 and the settlement is every 6 months. Assume a 360 day year.
Find the payoff if LIBOR closes at 8.2%.

• A) €0.00
• B) €25 000.00
• C) €50 000.00
• D) −€25 000.00
• E) −€50 000.00

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Definitions:

Natural Rate

The equilibrium rate of unemployment or interest when the economy is operating at a full capacity without short-term fluctuations.

Natural Rate

A concept referring to the level of economic activity or rate (such as unemployment) that corresponds to the economy's long-term potential or equilibrium state.

Long-run Unemployment

A situation where the unemployment rate persists at a high level for a long period of time, often due to structural changes in the economy.

Bureau of Labor Statistics

A U.S. government agency responsible for collecting and reporting data on employment, labor market activity, working conditions, and price changes.