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Hello Sir, In this problem, 1. Why are we taking 4 periods for premium calculation when the reset periods are 3? 2. Will this answer be given marks? (attached screenshot) Video Details Advanced Financial Management - AFM Interest Rate Risk Management 34. Illustration # 13 - Cap

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Thread Starter

Susee ArunachalamSo we have to discount by 4 periods, but pay only for 3 periods. And as for as the answer, can we directly calculate the inflow from Cap impact and subtract the premium paid? or do we have to calculate the actual interest paid and show the risk saved by Cap?

So we have to discount by 4 periods, but pay only for 3 periods. - yes becuase premia is paid upfront for a 2 years loan of 6 month reset i.e 4 periods And as for as the answer, can we directly calculate the inflow from Cap impact and subtract the premium paid? - you can do. as long as you show all numbers that are asked in the question it does not mater

Sriram Somayajula Admin

They specifically mentioned in question Lumpsum premium is 1% for entire periods hence, we are taking 4 periods If you take 3 periods they may not award marks

So we have to discount by 4 periods, but pay only for 3 periods. And as for as the answer, can we directly calculate the inflow from Cap impact and subtract the premium paid? or do we have to calculate the actual interest paid and show the risk saved by Cap?