Question

An Fl has purchased a $208 million cap of 9 percent at a premium of 0.65 percent of face value. A $208 million floor of 4.8 percent is also available at a premium of 70 percent of face value. a. If interest rates rise to 10 percent, what is the amount received by the FI? What are the net savings after deducting the premium? b. If the Fl also purchases a floor, what are the net savings if interest rates rise to 11 percent? What are the net savings if interest rates fall to 3.8 percent? (Negative amounts should be indicated by a minus sign.) c. If, instead, the Fl sells (writes) the floor, what are the net savings if interest rates rise to 11 percent? What if they fall to 3.8 percent? (Negative amounts should be indicated by a minus sign.) Amount received Net savings Net savings if interest rates rise to 11 percent Net savings if interest rates fall to 3.8 percent c. Net savings if interest rates rise to 11 percent Net savings if they fall to 3.8 percent

Answer 1

A given theat, II has purchased = $208 million cap of 9% at a premium of 0.65% of . face Value floor of 408% is also available at a S premium of 0.70 % of face Value cap holder will receive amount reas of increase in interest rate Amount received a - Encreased interest rate - cap rate)x face value Alet savings to Cap Holder 1. = Amount recived a premium paid floor Holder will receive in case of decrease Amount ived al floor rate - received anderest rate) x reee i faceValue @ Amount received - 208 (10%-90%.) s 2001 1..) = 2.08

Net savings = Amount received - premiers premiune powdl = 8087 0.65% 1.352 Ned savings - 2008-10352 the = 0.728 million b premium paid for floor - 208X0.70%. 2 10 456 Total premium powiet - prenucem of CAPE premium of floor = 1.352t 1.456 : 2.808 Given, if interest rate rises to 11% Amount received for Holding cap = 208 ( 11% -9%.) 20812%) Holt

Amount received for Holding floor = zero, as floor will not be exercised. Amount received 4.16 to ANG 4.16 million. Ned savings = Amount received a preminum paid Holb - 2-808 =$1.352 million. of interest rate fall to 3.8% Amount paid for Holding floor 200* (4:8 % – 3.8%) Amount received = ot 2.0B = 2.08 Net savings = 2.08 - 2.808 I-0.728

premium received at paid for cap for floor a 1-352 = 1.456 Dreme premium Net premium paid = 1.352 - 10456 = -0.104 af interest rate rise to 11% Amount received for Holding Cap = 2081119. - 9%. ) - Holt Amount paid for writing floor = zero, Amount received a 2016 Net savings - 2016 -00104) 40 167o.l04 =40624 million of interest rate falls to 3.8% Amount received for Holding floor a zere, Amount paid for writing floor 208641.8% +3.8%) :-2.08 Niet savings = -2.08 -0.loy = 2.184

- 11:3527 Amount received a 12.08) plet savings = 10:728) @ alat savings of interest rate res to 11% Alet savings if interest rates falls to 318% = 0.7287 @ Net Savings of enterest rates sise to 1 % -1406247 Alet Savinge of interest rate falls to 338% - 20184)