A Thrift Purchases a 1-Year Interest Rate Floor with a Floor

question 53

Multiple Choice

A thrift purchases a 1-year interest rate floor with a floor rate of 4.23% from a large bank. The option has a notional principle of $1 million and costs $2,000. If in one year, interest rates are 3%, the thrift's net profit, ignoring commissions and taxes was _____ and if in one year, interest rates were 2%, the thrift's net profit was _____.

• A) $0; $7,500
• B) $8,800; -$2,000
• C) $8,800; $0
• D) $29,500; -$2,000
• E) $29,500; $0 Max [(Floor rate - Actual rate) x NP, 0] - 2,000 = ((4.23%-3.15%) x $1 million) - 2,000 = $8,800; $0

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