Financial Engineering and Risk Management
Questions
1. Futures:
a. Identify the benefits of using futures for hedging, speculating and arbitraging with real examples.
b. Explore the comparative analysis of futures and forwards with the reference to previous studies.
2. SWAPS: (https://www.investopedia.com/terms/s/swap.asp)
a. Use real examples, e.g. business between IBM and MSFT, to explain how SWAPs enhance comparative advantages of business.
b. Evaluate the credit risk embedded in SWAPs and identify what contracts can be used to reduce the risks.
3. Options
a. Collect the live data from options markets on stock options, e.g. Apple options chain via NASDAQ and Yahoo finance. Explore and explain how to create major trading strategies involving options, e.g. butterfly, bull spread, bear / bull spread etc.
b. Compare the strategies across at least 5 stock options. Identify the similarities and differences. Link the trading strategies to company’s performance, financial environment, business cycles and economic policy.
4. Securitization
a. Appraise the contribution of financial innovations to the credit crisis 2007-2008.
b. Employ real business cases occurred 2007-2008 to address
‘What went wrong on derivatives market? Why? What lessons can be learned?
Objectives
The objective of this essay is to reflect on what we have learned from financial innovation and engineering in terms of the innovations in financial markets, e.g. ABS, MBS, and major derived financial contracts, e.g. futures, options and swaps. Also identify how innovative contracts contribute to financial instability and crisis, and what lessons can be learned. Meanwhile it enables students to become familiar with popular financial databases, e.g. Yahoo finance. Use them to collect financial data and analyse data using appropriate methods to achieve valuable conclusions.
