1.

a Rational: one possible reason, from a risk management perspective, for this asset manager entering into this lo
to adverse market price movements of sugar (market risk). As the asset manager wants to buy sugar, that adv
By entering into this long position, the asset manager is locking the purchase price of the sugar within 3 months

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
2 503 600 600 2100
3 495 -1600 -1000 500
4 489 -1200 -2200 300
5 495 1200 -1000 2700

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 1.15

1.c.i Optimal Number of contracts 11.0

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 16500
2 503 6600 6600 23100
3 495 -17600 -11000 5500
4 489 -13200 -24200 3300
5 495 13200 -11000 29700
 manager entering into this long position is to eliminate or reduce its exposure
wants to buy sugar, that adverse movement would be sugar price increases.
e of the sugar within 3 months.

Margin call

0
1000
1200
0

Margin call

0
11000
13200
0
 Long Shares 1000
Call Delta 0.4

2.a Delta-Hedging strategy

2.b Short in 2500 calls

2.c Market Price increases by 5€

Change in Long position value 5000 €
Change in Short position value -5000 €
Offset: Delta Neutral 0€ Off-set, i.e, the portfolio is said to be delta-neutralized
t, i.e, the portfolio is said to be delta-neutralized
3.a Correlation Swap with a 6-month maturity.

3.b The Hedge Fund should be long in the Correlation Swap, meaning that it will pay the correlation swap "strike" and re

3.c Notional (mln) 15

Correlation Swap Strike 35%

Average pairwise realized correlation

a) 20%
b) 40%

Hedge fund pays 5.25

Bank pays
a) 3
b) 6

=> net payments are:

Hedge Fund pays 2.25
Bank pays 0.75
the correlation swap "strike" and receive the average pairwise realized correlation
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% -3.900 4.50
30 January 2017 6.30% -4.350 4.50
30 July 2017 6.50% -4.725 4.50
30 January 2018 6.60% -4.875 4.50
30 July 2018 6.90% -4.950 4.50
30 January 2019 - -5.175 4.50

4.b Suppose the Asset Manager borrowed €150mn from one Bank, to buy corporate bonds,
paying to the Bank an annual fixed rate of 6%. Afterwards, the Asset Manager enters in this SWAP c
As a consequence, the Asset Manager has the following cash flows:

a) Pays LIBOR 6m under Swap agreement;

b) Receives fixed 6% under Swap agreement;
c) Pays fixed 6% to the Bank

=> Due to the SWAP, the Asset Manager transformed a fixed rate loan into a Euribor 6m loan (i.e va
 6%

Net Cash Flow

-
0.60
0.15
-0.23
-0.38
-0.45
-0.68

porate bonds,
ger enters in this SWAP contract.

o a Euribor 6m loan (i.e variable rate)