Tutorial-Financial Engineering

1. What direction is a bull market and which direction is a bear market.

2. If you buy a put and sell a call at $0.95 per euro. What payoff structure have you created?
3. If you sell a put and sell a call. What is the payoff of this structure? How will you benefit?
4. What is the critical difference between buying options and buying a future?
5. If you think an FX will move a little upward. What is the name of the position you want to
take. Discuss the options you should buy and sell. Why would you do this?
6. If you think an FX will move a downward upward. What is the name of the position you want
to take. Discuss the options you should buy and sell. Why would you do this?
7. What is the difficulty of using options to hedge a portfolio.
8. When does the hedge ratio change the most?
9. When does a hedge ratio change the least?
10. What are the advantages of using options/futures if I am a speculator?
11. The US dollar is currently trading at $0.98 per euro. Biogen is receiving 10,000 of euros in 6
months. The consensus forecast is $0.91per euro, but the CFO thinks a figure of $1.02 per
euros is more likely. The future is currently trading at $0.97 per euro, and call and put
options can be bought/sold at 0.92 strike at a cost/gain of $20 per 1000 euros.
a) How much is this in dollars at spot rate?
b) How much is this in sterling if the FX market is in line with consensus?
c) How much is this in sterling if the FX market is in line with the CFO?
d) If they use the futures hedging strategy. How many dollars will they get?
e) If the CFO wants to gain if the FX rate moves in his favour but be protected if they move
against him explain what trades would option trades would be conducted and final
amount in dollars.
f) If the CEO decides to fix it using options what would be do and how many dollars would
they receive.
g) Explain difference between OTC and futures and advantages of each?

Topic: Economic Holy Trinity

12. What is the holy Trinity in economics. Draw it and explain why no country can meet all these
criteria.
13. With the holy Trinity in mind- Explain the route that the US has chosen.
14. When the US was in Bretton Woods what was it attempting to do?
15. When the UK was in the ERM what was it attempting to accomplish- What does it do today?