MANG6298W1 MANAGEMENT OF FINANCIAL RISK
财务风险管理代写 DURATION: 120 MINUTES (2 HOURS) This paper contains THREE questions. Answer TWO questions in total. If you attempt more questions than required,
DURATION: 120 MINUTES (2 HOURS)
This paper contains THREE questions.
Answer TWO questions in total.
If you attempt more questions than required, only the required number of answers will be marked. Please strike through any answers that you do not wish to be marked. If you do not do this the marker will mark the answers in the order that they appear in your exam booklet(s).
An outline marking scheme is shown in brackets to the right of each question.
Only University approved calculators may be used.
A foreign language direct ‘Word to Word’ translation dictionary (paper version) ONLY is permitted provided it contains no notes, additions or annotations.
A formula sheet and the normal distribution table is provided.
(a) The gamma and vega of a delta-neutral portfolio are 50 per $ per $ and 25 per %, respectively. Estimate what happens to the value of the portfolio when there is a shock to the market causing the underlying asset price to decrease by $3 and its volatility to increase by 4%. [20 marks]
(b) What is a Gamma of a derivative? For which options is Gamma the greatest? [10 marks]
(c) What is delta of an option? [10 marks]
(d) What is Vega of a derivative? For which options is Vega the greatest? [10 marks]
Suppose that the price of an asset at close of trading yesterday was $300 and its volatility was estimated as 1.3% per day. The price at the close of trading today is $298.
Update the volatility estimate using:
(a) The EWMA model with l = 0.94 [15 marks]
(b) The GARCH(1,1) model with w = 0.000002, a = 0.04, and b = 0.94. [15 marks]
(c) Critically discuss the differences between the exponentially weighted moving average (EWMA) model and the generalized autoregressive conditional heteroscedasticity (GARCH(1,1)) models. [20 marks]
(a) What is a call option and what is put option? What is the difference between the American and European call and put options? [15 marks]
(b) Explain why long-term rates are higher than short-term rates most of the time. Under what circumstances would you expect long-term rates to be lower than short-term rates? [15 marks]
(c) Critically discuss why there are differences between the real-world (physical) and risk-neutral Probabilities. [20 marks]