A thrift purchases a one-year interest rate floor with a floor rate of 4.23 percent from a large bank. The option has a notional principal of $1 million and costs $2,000. If in one year,interest rates are 3.15 percent,the thrift's net profit,ignoring commissions and taxes,was ________; and if in one year,interest rates were 5.2 percent,the thrift's net profit was ________.

Question

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The net profit when interest rates are 3.15% is $8,800 because the floor pays the difference between the floor rate (4.23%) and the actual rate (3.15%) on the notional principal, minus the cost of the floor. When interest rates are 5.2%, the floor is not exercised, resulting in a loss equal to the cost of the floor, which is $2,000.

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