Miami Mutual Bank* purchases a two-year interest rate cap for a fee of 3 percent of...

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Miami Mutual Bank* purchases a two-year interest rate cap for afee of 3 percent of notional principal valued at $10 million, withan interest rate ceiling of 11 percent and LIBOR as the indexrepresenting the market interest rate. At the same time, MiamiMutual sells a two-year floor (8 percent) for a fee of 2 percent ofthe $10 million principal. Assume that LIBOR is expected to be 7percent and 14 percent at the end of each of the next two years,respectively. What is this type of strategy called? Also what dodollar amount do Miami Mutual Bank stand to gain or lose from thisstrategy?

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Miami Mutual Bank* purchases a two-year interest rate cap for afee of 3 percent of notional principal valued at $10 million, withan interest rate ceiling of 11 percent and LIBOR as the indexrepresenting the market interest rate. At the same time, MiamiMutual sells a two-year floor (8 percent) for a fee of 2 percent ofthe $10 million principal. Assume that LIBOR is expected to be 7percent and 14 percent at the end of each of the next two years,respectively. What is this type of strategy called? Also what dodollar amount do Miami Mutual Bank stand to gain or lose from thisstrategy?