QN

  
 

A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates), where payments are paid or received at the end of year 2 and 3 as shown below:
 

 

In addition to purchasing the cap, if the bank also sells a 3-year 6 percent floor and interest rates are 5 percent and 7 percent in years 2 and 3, respectively, what are the payoffs to the bank? Specifically, the bank

   

 

receive $50,000 at the end of year 2 and receive $50,000 at the end of   year 3.

   

pay $50,000 at the end of year 2 and receive $50,000 at the end of   year 3.

   

receive $0 at the end of year 2 and pay $50,000 at the end of year 3.

   

receive $0 at the end of year 2 and $50,000 at the end of year 3.

   

receive $50,000 at the end of year 2 and pay $0 at the end of year 3.