Q3. A bank buys a $100 million notional call option of 9% interest rate at a premium of 0.65% of face value.

(i) If interest rate rises to 11%, what is the net profit for the bank?

(ii) If interest rate falls to 8%, what is the net profit for the bank?

(iii) Give an example when the bank uses this call option as a hedge on the balance sheet.