Financial Engineering (CMSE11290)


The assignment involves providing a short report on the structured note issued by Deutsche Bank (DG), the investment bank. As part of this assignment, you will need to access the term sheet for the 7.50% Barrier Reverse Convertible on Iberdrola issued by Deutsche Bank, and which is supplied as a separate document. The header for the document is shown below:


You are asked to prepare a short report on the security (no more than 1000 words in total for parts 1 and 2) in order to:

  1. Explain in some detail how the structure was put together (this is a process known as reverse financial engineering where you can see the final product but need to work out, through your knowledge of how financial engineering is undertaken, how it was created).

Be sure to explain the principal building blocks but detailed technical explanations of the various financial instruments that are used to create the product is not really
required—or should be given in an appendix. (These are not part of the word count but keep these short. Excessive use of appendices will be penalised.)
(40% of mark)

  1. Do an analysis of the rewards and risks to investors in the structure. (N.B. consider doing this as a table. Examples of how these are laid out are to be found in securities prospectuses.) Note: You are expected to go beyond simply restating the risk factors that are in the term sheet by justifying these risks and including others that are not included.

(20% of mark)

  1. Use your knowledge gained in parts 1 and 2 to build a simple spreadsheet (e.g. if using a binomial option pricing model, with 4 or 5 steps–or another appropriate option pricing model)—but use your own judgement as to what constitutes

“simple”—to value the same structured security using current market conditions (i.e. as of March-April 2021); or alternatively, if you can obtain the data, as at the point of issue (April 2013). Think of this analysis as a “conceptual model” of the structure that will allow you to vary the constituent parts to understand what changing the “mix” will do the security’s performance and risks. Copy and paste this into an appendix of your report. You can even, if you consider it useful, undertake some sensitivity analysis using your conceptual model and include this in the appendix as well.

  1. The model should be self-explanatory to the reader so that they can understand how it is constructed and what it shows.
  2. This model should include the structuring of the note.
  3. All steps need to be explained.

(40% of mark)
Please ensure that in your report the above three elements are well differentiated.
Please ensure that your exam number is on the front page of the report.

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