1/2 2nd Semester 2020/2021 MID-TERM EXAMINATION FI507 E FINANCIAL ENGINEERING AND COMMODITY TRADING Time allowed : 1 hour Course : FINANCIAL ENGINEERING AND COMMODITY TRADING – FI507 E Instructor(s) : Guillaume BAGNAROSA, Pooya HEDAYATINIA STUDENTS INSTRUCTIONS Answer Answer in English on a word document to upload on moodle Calculator Any calculator Dictionary Foreign students, whose native language is not English are allowed to use their own dictionary. Documentation Documentation is allowed Appendix No appendix. INTENDED LEARNING OUTCOMES (ILOs) TESTED BY THE EXAM 1. Understand in detail the behaviour of derivatives and their role in structuration business 2. To manage a portfolio of derivatives such as options and futures 3. Detect and understand the risks associated to derivatives portfolios 4. Understand and analyse financial markets behaviour in particular equities, currencies, interest rates, commodities and hedge funds 5. Have a better understanding of investment banks and hedge funds businesses 100 MARKS IN TOTAL, AWARDED ACCORDING TO THE FOLLOWING TABLE: Question 1 100 points Total 100 points 2/2 MID-TERM EXAMINATION FINANCIAL ENGINEERING AND COMMODITY TRADING – FI507 E Question 1 (100 points) Additional information about this BLOOMBERG screen shot: We are the 19th of March 2021
SX5E corresponds to the underlying asset (Euro Stoxx 50) the spot price is at this time 3851.98 (value on the top left corner in red) On the left hand side of the table (orange part) you have the information about the Call options per maturity (16-Apr-21; 21-May-21; 18-Jun-21) while on the right hand side (yellow part) the same information is provided but for the Put options. Regarding the columns names: Ticker: Bloomberg Name for this option Strike: Strike price Last : Last traded price IVM : Implied Volatility tTM: Theta tGM: Gamma for 1% change tDM: Delta tVM: Vega Questions: a. (30 points) Give a definition of the gamma trading and the delta hedging If you sell and delta hedge the Call option, maturity 16-Apr-21 with a strike 3850, under which conditions this strategy will generate a profit b. (20 Points) Give a definition and the rationale of the implied volatility smile Can we observe it on the Bloomberg screen shot c. (20 points) If you expect the implied volatility to increase in the future which option is the most appropriate If you expect an increase of the realized volatility, which option would you choose d. (30 Points) Build a bull spread 3800/3875 on the maturity 16-Apr-21 Explain your greeks exposures in detail. How this position and the associated risk will evolve over time and if the underlying price changes