alleryStart learning →A caplet has strike 5%. The rate sets at 4%. What is the payoff?
A1% of notional received
BThe premium is refunded
CZero, it expires worthless
D1% of notional is paid
Answer & Solution
Correct answer: C. Zero, it expires worthless
The payoff is max(rate minus strike, 0), which is zero when the rate is below the strike.
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