3.1

Company X writes 200 three-month put options on Bank A shares with a strike price of R270 and a premium of R2,50. Calculate the profit/loss will Company X realise if the share price rises to R280?

3.2

Company B has a 10-year asset that yields fixed income of 8 percent per annum. The company finances the asset with sixmonth commercial paper that pays interest at six-month JIBAR + 100 basis points.

3.2.1

What major risk does Company B face? and how will Company B best hedge this risk? [3]

3.2.2

List the cash flows involved with a vanilla fixed-for-floating currency swap. [2]

3.3

Motivate whether the following statements is a benefit/property of credit derivatives or not:

3.3.1

They enable hedging out credit risk of securities that are illiquid and hard to sell.

3.3.2

They reduce the overall level of default risk in an economy.