D&R A3 4 -1 Tango Bank has contracted to lend $80 million to Delta Co. in three months’ time. This loan will be for a period of six months. To hedge against the risk of interest rates dropping, Tango...

D&R A3

4 -1

Tango Bank has contracted to lend $80 million to Delta Co. in three months’ time.

This loan will be for a period of six months.

To hedge against the risk of interest rates dropping, Tango has purchased an interest rate put option.

The put option has an exercise rate of 2.15% and a maturity of three months.

The underlying forward rate is based on the LIBOR, which has a current term structure of

The terms of the LIBOR specify 30 days in a month and 360 days in a year. The volatility on the underlying forward rate is 0.25. Tango uses the Black Model to estimate the call premium.

What is the contract premium?