3. In this question we will design a loan guarantee also known as a creditdefault swap when applied to bonds and as deposit insurance when applied to bank deposits for the loan in the unit trust from the rst lecture. Loan guarantees, as the name suggests, guarantee the performance of the loan and, as such, hedge default risk. Use a detailed payoff diagram of the (i) loan without the loan guarantee, (ii) loan guarantee, and (iii) loan with a loan guarantee for the following situations: (a) Your parents want their loan to be riskfree. Hint: review the construction of a synthetic riskfree loan. (b) Your parents want to have at least USD 50 in the event of default. For each diagram provide a brief explanation of how the loan guarantee works