1(a) Pacific Airline decides to use a collar to hedge the oil price risk. The lower strike is 55 and the higher strike is 60. The options mature in 6 months and the annualized 6-month interest rate is 6% (p.a.). Below is the relevant put and call premiums:

Strike	Call premium	Put premium
55	6.23	3.42
60	3.92	6.04

(i) What is the cost of the collar position?

(ii) As Pacific Airline is your client, you have become the counterparty. What is the oil price in 6 months such that you will break-even?

(b) Pacific Airline wants to borrow $100,000 6 months later for 3 months with a Forward Rate Agreement. The following table shows bond market information.

Maturity (month)	Zero Coupon Bond Price
3	0.988
6	0.971
9	0.953
12	0.933

(I) What is the forward rate of the FRA (effectively for 3 months)?

(ii) Suppose 6 months later, the 3-month annualized spot rate is 5%. What is the settlement amount of the FRA if settle in arrears?

(iii) Instead of using an FRA directly, what positions in zero coupon bonds could Pacific Airline use to synthetically create the FRA borrower position?

a. Long 6 months ZCB, Short 9 months ZCB

b. Long 6 months ZCB, Long 9 months ZCB

c. Short 6 months ZCB, Long 9 months ZCB

d. Short 6 months ZCB, Short 9 months ZCB