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

---

Definitions:

Empirical Economics

The branch of economics that analyzes data to develop verifiable theories or evaluate economic policies.

Economic History

The study of economies or economic phenomena in the past.

Aggregate Price Level

A measure of the overall level of prices of goods and services in an economy over a specified period, often used as an indicator of inflation.

Macroeconomics

The branch of economics that studies the behavior and performance of an economy as a whole, focusing on aggregate phenomena such as GDP, unemployment rates, and inflation.