Financial Engineering Case Study

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CHAPTER 1: DERIVATIVES: INTRODUCTION AND OVERVIEW
Question 4: What is the meant by financial engineering? What is the role of derivative instruments in financial engineering? Financial engineering can be defined as a multidisciplinary field which involve theories of financial, engineering methods and mathematical tools to solve the risk problems (Student resources, 2013). Financial engineering applied mathematics, computer science, statistics and economic theory as tools to make pricing, hedging, trading and portfolio management decisions. Mostly, financial engineers will be employ by companies such as investment banks and commercial banks, insurance companies, corporate treasuries, hedge funds and regulatory agencies …show more content…

The exchange requires him to post RM300,000 as initial margin. If the maintenance margin is RM250,000, what price change (per ton) would lead to a margin call? What price change lead to RM30,000 being credited to his margin account?

(i) Margin call
500 tons (RM6,000 per ton- RM x) = -RM50,000
(RM6,000 per ton- RM x) = -RM50,000 / 500 tons
RM x = RM6,000 + RM 100
RMx = RM6,100
 When the margin balance falls below RM6,100 per ton, the party will receive a margin call from his broker.

(ii) 500 tons (RM6,000 per ton - RM x) = RM30,000
(RM6,000 per ton - RM x) = RM30,000/500 …show more content…

Question 12: Suppose you bought one gold futures contract for August delivery at its 2 April settlement price of $279/oz. Assume that both the last trading date and the delivery date are 27 August. Assume that your borrowing and lending rates are 8%per year, and that you borrow to met any mark-to- market cash outflows and lend any mark to market inflows. (a) If the gold futures price remains unchanged until 26 August then falls to $250/oz, on 27 August, what is your profit or loss per ounce?
$250/oz - $279/oz = -$29/oz
(b) If, instead, the gold futures price falls to $250/oz, on 3 April and stays there until the delivery date, what is you profit or

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