You have sold a $10,000 notional cap consisting of a single caplet with a strike of 6% for a six-month underlying period. All interest rates are computed based on the 30/360 convention. At maturity of the cap period, the underlying interest rate is 7%. What is the net cash flow to you on maturity?
A) $- \$ 50.00$
B) $+ \$ 48.31$
C) $- \$ 48.31$
D) $+ \$ 46.73$

Question

Quizplus · Accepted Answer

The caplet pays when the underlying rate exceeds the strike rate. The payoff is calculated as: Notional * (Underlying Rate - Strike Rate) * (Days/360). Here, it is $10,000 * (7% - 6%) * (180/360) = $50. The net cash flow to you is negative because you sold the caplet, resulting in a cash outflow of $50.

You Have Sold a $10,000 Notional Cap Consisting of a Single