The 4%-Strike Six-Month Libor-Based Two-Year Cap and Floor Are Trading $- \$ 0.25$

The 4%-strike six-month Libor-based two-year cap and floor are trading at $2.30 and $2.55, respectively. Assume that the cap has 4 caplets maturing in 6 months, 1 year, 18 months, and 24 months, respectively, and that the floor similarly has 4 floorlets. What is the NPV at inception of a two-year swap in which you are paying Libor versus receiving 4%?

A) $- \$ 0.25$
B) $0
C) $0.25
D) There is not enough information to determine the price of the swap.

Correct Answer:

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