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TURBO EXTRA

Suppose you were selected by the board of Extra Bank to manage a portfolio ofwarrants on the Dow Jones Eurostoxx 50 index.

Extra Bank issued on the 28th Sept.2007 a series of 3 million plain vanilla call warrants

with a 9-month maturity and a series of 5 million plain vanilla put warrants with a 15-

month maturity. On the 26th June 2009, the board decided to issue two series of turbo

warrants expiring 6 months after. These turbo warrants are barrier options, being one of

the series a callup-and-inand the other a put down-and-out.

The warrants issued are detailed in the next table:

Series Issuancedate

Quantity Expiry Date StrikePrice

Barrier / Indexfigure

WarrantsJun 2008call 28-09-2007 3.000.000 27-06-2008 4.700 - 10WarrantsDec 2008put 28-09-2007 5.000.000 29-12-2008 4.300 - 10

TurboWarrantsDec 2009call up andin 26-06-2009 5.000.000 30-12-2009 2.700 3000 10TurboWarrantsDec 2009put downand out 26-06-2009 2.000.000 30-12-2009 2.500 2200 10

Note: consider the parity of the warrants as 0,01.

ISIN code of the DJ Eurostoxx 50 - EU0009658145SX5E; Datastream mnemonic:

DJES50I (more details on the DJ Eurostoxx 50 in http://www.stoxx.com)

Please answer to the following questions, considering the information provided:

1) What should be the issuance price of the plain vanilla warrants? Toestimate the future volatility use the model GARCH (1,1), considering

the returns in the last 30 trading days, or an adequate alternative. In order

to value the plain vanilla warrants use the Black-Scholes model.

2) With the purpose of hedging the risk of the plain vanilla warrantsportfolio, assume you decide to open a position in the futures contracts

on the Dow Jones Eurostoxx 50 expiring at June 2008. Determine the

position to open in these futures contracts on the 28th Sept. 2007, aimingat minimising the portfolio risk, using a delta hedging strategy for each

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series of plain vanilla warrants (consider the Black-Scholes model in the

pricing of warrants).

3) What was the behaviour of the hedging portfolio considered in theprevious question (just for the plain vanilla warrants) between 28 Sept

2007 and 12 May 2008? Calculate the number of futures contracts usedto keep hedging positions opened. Proceed also with the cash portfolio

required for the margin account and its daily adjustments, adopting the

necessary assumptions.

4) Regarding the Turbo Warrants portfolio, propose the pricing of theseoptions on the issuance date (26 June 2009), by using a closed formula

model (e.g. a Black-Scholes type model for barrier options).

5) In order to hedge the risk of the turbo warrants portfolio, consider thatyou decide to open positions in futures contracts on the Dow Jones

Eurostoxx 50 index, expiring at Dec.2009. What would be the size of theposition to be opened on the 26th June 2009, in order to minimise the

portfolio risk by using a delta hedging strategy for each series of Turbo

warrants. Discuss the performance of this hedging portfolio between 26

Jun.2009 and 6 Nov.2009.

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APPENDIX

Dow Jones EURO STOXX 50 futures

Exchange Eurex

Settlement Cash settled

Trade Unit 10 multiplied by the value of the index

Point Value 10

Tick Value 10

Contract Months: Up to 9 months: The three nearest quarterly months of the March,

June, September and December cycle.

Last Trading Day: Last Trading Day is the Final Settlement Day, which is the third

Friday of each maturity month if this is an exchange day; otherwise the exchange day

immediately preceding that day. Close of trading in the maturing futures on the Last

Trading Day is at the Beginning of the Xetra intraday auction starting at 12:00 CET.

Trading Hours: 7:50 am CET to 22:00 (10:00 pm) CET, except on last trading day,

when trading ends at 12:30 pm CET (Eurex operates in three trading phases: pre-trading, trading and post-trading. The post-trading phase is further split in several

periods where different functions are available. Pre-trading begins at 7:30 am CET, and

post-trading ends at 22:30 (10:30 pm) CET, except on the last trading day, when trading

ends at 12:00 CET)

Ticker Symbol: FESX