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ECO4108Z Exam Scope and Test Memo

The exam for ECO4108Z, scheduled for 12th September 2024, will cover various topics in finance, including credit derivatives, commodity derivatives, equity derivatives, option valuation, and option Greeks, totaling 100 marks over 3 hours. All course material is examinable, with specific formulas provided for Black-Scholes and Option Greeks. Additionally, the document outlines the differences between cash-funded and synthetic CDOs, groupings of credit derivatives, and various trading strategies.

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9 views23 pages

ECO4108Z Exam Scope and Test Memo

The exam for ECO4108Z, scheduled for 12th September 2024, will cover various topics in finance, including credit derivatives, commodity derivatives, equity derivatives, option valuation, and option Greeks, totaling 100 marks over 3 hours. All course material is examinable, with specific formulas provided for Black-Scholes and Option Greeks. Additionally, the document outlines the differences between cash-funded and synthetic CDOs, groupings of credit derivatives, and various trading strategies.

Uploaded by

Ziyaanprice Price
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Exam Scope and Test Memo

ECO4108Z
12th September 2024

Dr Ayesha Sayed
Senior Lecturer (Finance)
Department of Finance and Tax
University of Cape Town
Exam Scope
• 100 marks, 3 hours:
– Credit Derivatives: 15 Marks
– Commodity Derivatives: 25 Marks
– Equity Derivatives: 10 Marks
– Option Valuation: 30 Marks
– Option Greeks: 20 Marks

• All work covered during the course is examinable.

• Only formulas that will be given in Black-Scholes and Option Greeks, and
you will be given the normal distribution table
Test Memo

1.1 call option


1.2 put option
1.3 forward contract
1.4 short futures contract
1.5 currency swap
Cash-funded CDO Synthetic CDO
• constructed with an actual sale and transfer of the loans or • the sponsoring bank or other institution transfers the risks and
assets to the CDO trust returns of a designated basket of loans or other assets via a
credit derivative transaction, usually a credit default swap or a
credit return swap.
• ownership of the assets is transferred from the bank’s
balance sheet to that of the CDO trust in return for cash • the bank transfers its risk profile associated with its assets, but
does not give up the legal ownership of the assets and does not
• involves the actual purchase of the portfolio of securities receive cash from selling assets.
serving as the collateral for the trust and to be held in the
trust. • the CDO does not actually own the underlying assets

• • gains its credit exposure through the use of a credit derivative


physical ownership of the assets is acquired by the CDO
such as a total return swap or a credit default swap.

• can be used to completely replace risky assets with cash on • Physical ownership of the underlying basket of securities is
a financial institution’s balance sheet, rather than not transferred to the CDO
synthetically removing only the risk through derivatives.
Groupings of Credit
Derivatives:
1. Single name vs multi name
instruments:
Single-name credit derivatives transfer the credit risk associated with a single entity. Single-
name CDS are the most popular way to allow one party to buy credit protection from another
party. Multiname instruments, in contrast, make payoffs that are contingent on one or more
credit events (e.g., defaults) affecting one or more reference entities.

2. Funded vs unfunded:
Unfunded credit derivatives involve exchanges of payments that are tied to a notional amount, but the
notional amount does not exchange hands until a default occurs. An unfunded credit derivative is similar
to an interest rate swap in which there is no initial cash purchase of a promise to receive principal, but
instead only an agreement to exchange future cash flows. The most common unfunded credit derivative is
the CDS. Unfunded instruments expose at least one party to counterparty risk. Funded credit derivatives
require cash outlays and create exposures similar to those gained from traditional investing in corporate
bonds through the cash market

3. Sovereign vs nonsovereign:
Credit default swaps were widely used during the European sovereign debt crisis. For example, investors
purchased Greece's sovereign debt through sovereign bonds to help the country raise money. They also
purchased CDSs to protect their capital in case the country defaulted.
0,045/4 * R60 million = R675 000 per quarter

Trigger event after 8 quarters: R5.4 million paid from Umgeni Investments (credit protection
buyer) to Protea Risk Management (credit protection seller).

Protea pays cash payment to Umgeni of R60 million when trigger event occurs.

CDS terminate, no further cash flows and exchanges take place.


Attachment point/ Tranche Width Overcollateralisation
Detachment point
Senior 30%/100% 70% 42,86%

Mezzanine 5%/30% 25% 5,26%

Equity 0%/5% 5% 0
Collar strategy

Profit in Bulllish Outcome: X2 – (So+Po-Co))

270 – (250+5,50-8,50)
= R230 000
Butterfly Spread

Hold call at X1,


Hold call at X3,
Write 2 calls at X2
Cost: C1+C3-2(C2): 25+8,50-2(16)= R1,50
Lewis: Sophie:

Strangle, hold a put and hold a call Strip, hold 2 puts and 1 call

(70-50) – (8+6,5) (70-50) – (13+8)

5,50 profit 1 loss

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