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The customer has a five year $5 million bank loan bearing interest at a rate based on one month LIBOR. The customer would like to limit its exposure to any increase in LIBOR above 8.00% and therefore purchases a five year 8.00% cap on LIBOR from Wachovia. However, to avoid up-front fees, the customer sells Wachovia a 6.80% floor. The collar is structured as follows:
— Whenever one month LIBOR is greater than 8.00% on a reset date, Wachovia will pay the customer the difference between LIBOR and 8.00%; and
— Whenever one month LIBOR is less than 6.80% on a reset date, the customer will pay Wachovia the difference between 6.80% and one month LIBOR.
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