Question 3 a) Assume the 6-month oil future contract is trading at $56.68. The spot price is $62.94. Interest rates stand at 1.63% with continuous compounding and storage cost for oil are $1.50 payable at the end of the period. Determine whether there is an arbitrage opportunity and provide your recommendation to exploit on this opportunity (if any). (10 marks) b) A US company will receive GBP 50 million in six months. The current spot rate is GBP/USD 1.3235 and the current 6-month futures rate is GBP/USD 1.3175. The company has the choice to hedge using futures or options. The option's strike price is GBP/USD 1.3200 and the premium (option price) equals $550,000. Assuming in six months, the spot rate is GBP/USD 1.3180, what instrument should the company have chosen? Justify your answer. (20 marks) c) Discuss how Credit Default Swap (CDS) works and use a diagram(s) to support your explanations. (20 marks) [Total: 50 marks] Question 3 a) Assume the 6-month oil future contract is trading at $56.68. The spot price is $62.94. Interest rates stand at 1.63% with continuous compounding and storage cost for oil are $1.50 payable at the end of the period. Determine whether there is an arbitrage opportunity and provide your recommendation to exploit on this opportunity (if any). (10 marks) b) A US company will receive GBP 50 million in six months. The current spot rate is GBP/USD 1.3235 and the current 6-month futures rate is GBP/USD 1.3175. The company has the choice to hedge using futures or options. The option's strike price is GBP/USD 1.3200 and the premium (option price) equals $550,000. Assuming in six months, the spot rate is GBP/USD 1.3180, what instrument should the company have chosen? Justify your answer. (20 marks) c) Discuss how Credit Default Swap (CDS) works and use a diagram(s) to support your explanations. (20 marks) [Total: 50 marks]