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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
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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?