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

Question

Quizplus · Accepted Answer

The payoff is the difference between LIBOR and 8% multiplied by the amount of the option. In this case, the payoff is (8.2% - 8%) * €2,500,000 = €25,000.

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