The payoff of an interest rate libor floor

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Reference no: EM131049675

The payoff of an interest rate LIBOR floor (the opposite of a cap) is of the form max[K - Last period LIBOR rate), 0]. That is, if rates go below K, the option writer will pay the difference, nothing otherwise. If you buy floors for a one-million notional on quarterly LIBOR with a strike price of 2.5% (annually), what will be your payoff if last quarter LIBOR rates were the following (do not forget that rates are in annual terms and you need to convert them into quarterly numbers before calculating your payoff):

LIBOR(last quarter) Payoff

2.96%

Reference no: EM131049675

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