Assume a Binomial Pricing Model Where There Is an Equal

Multiple Choice

Assume a binomial pricing model where there is an equal probability of interest rates increasing or decreasing 1 percent per year. What should be the net price of a $5,000,000 collar if the bank purchases a three-year 6 percent cap and sells a 5 percent floor, if the current (spot) rates are 6 percent?

A) The bank will receive net $2,010.
B) The bank will receive net $31,651.
C) The bank will pay net $31,651.
D) The bank will pay net $2,010.
E) price = $0