Assume two exercise dates at t

Assume two exercise dates at the end of year 2 and the end of year 3. Suppose the FI buys a floor of 4 percent at time 0. The binomial tree suggests that rates at the end of year 2 could be 3 percent ( p  = 0.5) or 5 percent ( p  = 0.5) and at the end of year 3 rates could be 2 percent ( p  = 0.25), 4 percent ( p  = 0.5), or 6 percent ( p  =  0.25). Calculate the fair value of the floor premium. Assume the notional face value of the floor is $100 million. ($924,400)

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