Determine the firm cash flows on loan

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Reference no: EM131625254

On January 1, a firm takes out a loan of $100 million, with interest payments to be made on April 1, July 1, October 1, and the following January 1, when the principal will be repaid. Interest will be paid at LIBOR. The firm wants to buy a cap with an exercise rate of 4% and a premium of $50,000 but is concerned about the cost. Its bank suggests that the firm sell a floor with an exercise rate of 3% for the same premium. The current LIBOR is 4%. Determine the firm’s cash flows on the loan if LIBOR turns out to be 4.5% on April 1, 5% on July 1, 3.5% percent on October 1, and 4.2% the following January 1. Assume 90 days between interest payments, and use a 360-day year convention.

Reference no: EM131625254

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