firm a borrows $10 million for 12 months, with floating rate

Firm A borrows $10 million for 12 months, with floating rate interest referenced to 3 month AUD libor, and paid quarterly. For the premium of 0.20% p.a., Firm A can purchase a cap with a strike rate of 8% p.a. Libor at the start of each quarter was 8.8%, 8.3%, 8.0% and 7.6% respectively. Firm A uses a cap to conduct a borrowing hedge.

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  1. Compute the net cash flows for today and at the end of the 4 quarters

  2. Compute the effective borrowing rate with the cap.

  3. Compute the effective borrowing rate without the cap

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