1.

1.b Contract Size (units) 200

Initial margin/contract (€) 1500
Maintenance margin/contract (€) 1400

Daily gain Cumulative gain Margin account

Day Futures price (€ per unit) (loss) (loss) balance
1 500 1500
2 503
3 495
4 489
5 495

1.c
Position to hedge 2000
Standard deviation of spot price 0.08
Standard deviation of future price 0.06
Correlation between spot and future 0.86

Optimal Hedge ratio

1.c.i Optimal Number of contracts

Contract Size (units) 200

Initial margin/contract (€) 1500
Maintenance margin/contract (€) 1400
1.c.ii
Daily gain Cumulative gain Margin account
Day Futures price (€ per unit) (loss) (loss) balance
1 500
2 503
3 495
4 489
5 495
Margin call

Margin call
 Long Shares 1000
Call Delta (Euro) 0.4

2.a

2.b

2.c Market Price increases by 5€

Change in Long position value €
Change in Short position value €
Offset: Delta Neutral €
3.a

3.b

3.c Notional (mn) 15

Correlation Swap Strike 35%

Average pairwise realized correlation

a) 20%
b) 40%

Hedge fund pays

Bank pays
a)
b)

=> net payments are:

Hedge Fund pays
Hedge Fund pays
4.a Notional 150 €mn Fixed Interest rate

Date Libor 6m Variable Cash Flow Fixed Cash Flow

30 January 2016 5.20%
30 July 2016 5.80%
30 January 2017 6.30%
30 July 2017 6.50%
30 January 2018 6.60%
30 July 2018 6.90%
30 January 2019 -

4.b
 6%

Net Cash Flow