Page 1 of 4 COMSM0047 INTERNET ECONOMICS AND FINANCIAL TECHNOLOGY Closed Book – Mock Exam December 2021 TIME ALLOWED: 2 Hours This paper has eleven questions. You should answer them all, for a maximum of 60 marks. TURN OVER ONLY WHEN TOLD TO START WRITING Use of calculators is permitted Page 2 of 4 Q.1: What is meant by the phrase “the gig economy” Name two online platform companies prominent in enabling the gig economy. [3 marks] Q.2: Who is credited as being the inventor of Bitcoin [1 mark] Q.3: Why is versioning used more extensively by providers of digital products than providers of physical products [2 marks] Q.4: An eBay auction has a fixed time limit. What effect does this have on the strategy of bidders, and why What did eBay introduce to try to stop this effect What alternative approach could they have taken [5 marks] Q.5: State, and briefly describe, the LASIC principles of success for a financial technology. [5 marks] Q.6: The current state of the Limit Order Book (LOB) is shown below: Bid Ask Qty Price Price Qty 6 ￡36.00 ￡42.00 6 1 ￡34.00 ￡47.00 4 6 ￡30.00 A new limit order to buy 7 units at limit price ￡48 then arrives at the exchange. Show the new state of the LOB and state the new mid-price of the LOB. [3 marks] Q.7: What is the difference between “crowdsourcing” and “crowdfunding” Give an example technology or application for each. [2 marks] Q.8(a): In what situation is it advisable to purchase a combination of tradeable options that combine to give a “Long Butterfly” strategy [1 mark] Q.8(b): Show the payoff diagram for a Long Butterfly strategy, illustrating how it can be constructed from a mix of long call options and short call options. [5 marks] Page 3 of 4 Q.9(a): A sequence of orders for a particular security is received by an electronic exchange that publishes as Limit Order Book (LOB) summarising the state of the market for that security on that exchange. If the LOB’s best bid price is currently ￡5.00 with a quantity of 10 available at that price, and the best offer/ask is ￡10.00 with a quantity of 190 available at that price, what is the current value of the LOB’s spread What is the current value of the LOB’s microprice [2 marks] Q.9(b): What advantage does the LOB’s microprice offer over the midprice, as an estimate of the underlying theoretical equilibrium price [1 mark] Question 10: Methods exist to harness the opinions of crowds to try to predict future events. Q.10(a): Describe in detail how you would set up a “winner takes all” prediction market for the following event with binary outcome: “Boris Johnson will be UK Prime Minister at noon on 25th December 2020”. [5 marks] Q.10(b): Explain how sentiment analysis might be applied to automated trading of corporate stocks. How might opinion spamming be used to exploit such an approach What measures could be taken to reduce or prevent this risk [8 marks] Q.10(c): On 23rd April 2013, a tweet was sent on The Associated Press’ Twitter feed announcing: “Breaking: Two Explosions in the White House and Barack Obama is injured”. What happened next, and what is this event now commonly called [2 mark] Page 4 of 4 Question 11 After graduating from Bristol, you set up a technology consultancy company. A couple of days later you are approached by representatives of Great Vampire Squid Inc., an investment bank, who ask you to independently evaluate a new autonomous trading algorithm that they have been developing, codenamed BloodFunnel. The brief from GVS Inc. states: A well-equipped experimental economics laboratory will be made available to you, and you are asked to test our BloodFunnel trading robot against some established and well- known trading algorithms. We want you to run the style of experiments pioneered by Nobel Prize winner Vernon Smith: a CDA market for a single tradeable commodity, with traders in the markets being either buyers or sellers. We’ve done some exploratory trials with BloodFunnel and one thing we consistently notice is that the distribution of its performance scores (measured by profit, or efficiency, or anything else we’ve tried) is always distinctly multi-modal and heavily asymmetric (skewed). We are most interested in knowing how BloodFunnel performs against the following trader algorithms: ZI-C; Sniper; and ZIP, because they were the strategies used by IBM when developing and testing the MGD and GDX trading algorithms. We would also like to know how BloodFunnel performs against human traders. We need the analysis of the results to be statistically rigorous. Shortly after you start preparing for your experiments, the CEO of GVS drops into the laboratory unannounced. She asks you to explain what you plan on doing, and why. You show her the brief. She says: “Look, I am a brilliant but busy billionaire, and yet even I’m not sure I know what a CDA is, or how ZI-C or Sniper or ZIP work. And even if I did know that stuff, I don’t know what experiments this Vernon Smith guy ran, nor what you plan on doing. Please just explain to me in plain English exactly what all this means, and what experiments you plan to do here, and how you’re going to make sure the analysis of our BloodFunnel trader will be rigorous.” Write down what you’d tell the CEO. [15 marks] END OF PAPER
