3. The term structure is flat at 5% per annum with continuous compounding. Some time ago a financial institution entered into a 5-year swap with a principal of $100 million in which every year it pays 12-month LIBOR and receives 6% (both annual compounding). The swap now has two years eight months to run. Four months ago 12-month LIBOR was 4% (with annual compounding).

a) What is the value of the swap to the financial institution today?

b) What is the financial institutions credit exposure on the swap? That is, what if the counterparty of the financial institution defaults?

4. Today is May 4th 2022. A Put option on Alibaba Group Holding Ltd (9988) has a maturity date of 29th Jun 2022, the exercise price is HKD 95, the Put option is trading on the Exchange at HKD 9.11. The Spot price of Alibaba is HKD 96.55 and the stock dont pay any dividend.

a) Is the Put option In-the-money or Out-of-the-money?

b) if you are to buy this Put option, what is your maximum loss .

c) What is the spot price where you can break even.

d) Using Put-Call parity theory, what should be the price of the Call option for the same maturity and same exercise price? HIBOR for 2 months is 1.8% p.a.

e) If the Call option on Alibaba with maturity date 29th Jun, exercise price HKD 95 is trading on Exchange at HKD 10.5, assuming there is no transaction cost, is there an arbitrage opportunity? select the related transactions to capture the arbitrage

Select one or more:

a.Borrow a loan that for HKD 95 on 29th June 2022 @ 1.8% p.a.

b.Make a deposit that repay HKD 95 on 29th June 2022 @ 1.8% p.a.

c.Sell the Ailibaba 29th June 2022, HKD 95 call option

d.Buy Ailibaba share @ HKD 96.55

e.Sell Ailibaba share @ HKD 96.55

f.Buy the Ailibaba 29th June 2022, HKD 95 call option

g.Buy the Ailibaba 29th June 2022, HKD 95 Put option

h.Sell the Ailibaba 29th June 2022, HKD 95 Put option