FTS Trading Cases
The following provides a sample of FTS Trading cases. The system is designed so that you can create your own cases before class or change important parameters during trading. For example, some instructors like to change the shape of the yield curve during a class session. Finally, suggested case solutions and trading notes are provided with the system.
Case Objective
To understand the time value of money; to understand the cash flows from coupon and zero coupon bonds; to apply the discounting formula to value such bonds.
Key Concepts
Time value of money; discounting; determining bond prices given interest rates.
Case description
In this case, there are 2 bonds. The market lasts for three periods. The first bond is a coupon bond with a coupon interest rate equal to 20%, the second is a zero-coupon bond. Both bonds have a face value equal to 100. The cash flow from each bond at the end of each period is shown in the table below.
The interest rate is fixed at 25% every period. If you have any cash left at the end of a period, you will receive interest on the cash at 25%. You are also allowed borrow cash (at 25%). You can short sell bonds. If you short sell a bond and don’t cover your position, then you will have to pay any coupons and/or face value on that bond at the end of the period.
Prices in this case are determined by the traders, so all trades will take place at bids and asks that either you or another trader in the system puts in.
Case Data
The cash flows for the two bonds are shown below.
|
Payout at end of Period 1 |
Payout at end of Period 2 |
Payout at end of Period 3 |
|
|
Cp Bond |
20 |
20 |
120 |
|
Zero Cp |
0 |
0 |
100 |
Trading Objective
Your aim is to make as much money as you can.
Sample Trading Screen
Case Objective
To understand the time value of money; to understand the cash flows from coupon and zero coupon bonds; to determine the prices of bonds given a yield curve; to understand arbitrage relationships and cash matching.
Key Concepts
Time value of money; discounting; bond prices and interest rates.
Case description
In this case, there are 4 bonds. The market lasts for three periods. The first bond is a coupon bond with a coupon interest rate equal to 10% while the other bonds are zero-coupon bonds. The zero coupon bonds mature at the end of period 1, period 2, and period 3 respectively. All four bonds have a face value of 100. The cash flow from each bond at the end of each period is shown in the table below.
The interest rate is initially 4%. In period 2, it is 10%, while in period 3, it is 16%. This means that if you have any cash left at the end of period 1, you will earn 4% interest on it; cash at the end of period 2 earns 10%, and so on. You can also borrow at these rates in each period.
You can short sell bonds. If you short sell a bond and don’t cover your position, then you will have to pay any coupons and/or face value on that bond at the end of the period.
Prices in this case are determined by the traders, so all trades will take place at bids and asks that either you or another trader in the system puts in.
Case Data
The cash flows from bonds are:
|
Payout at end of Period 1 |
Payout at end of Period 2 |
Payout at end of Period 3 |
|
|
Cp Bond |
10 |
10 |
110 |
|
Zero C1 |
100 |
0 |
0 |
|
Zero C2 |
0 |
100 |
0 |
|
Zero C3 |
0 |
0 |
100 |
Trading Objective
Your aim is to make as much money as you can.
Sample Trading Screen
Case Objective
To understand the cash flows from forward contracts on bonds; to determine forward prices on bonds.
Key Concepts
Forward contract; time value of money; discounting; bond prices and interest rates.
Case description
There are 4 bonds and two forward contracts. The market lasts for three periods. Each bond has a face value of 100. The cash flow from each bond at the end of each period is shown below. The first forward contract is on the zero coupon bond that matures in period 2, and the forward contract matures at the end of period 1. The second forward contract is on the zero coupon bond that matures at the end of period 3, and the forward contract itself matures at the end of period 2.
The interest rate is initially 4% In period 2, it is 10%, while in period 3, it is 16%. You earn interest on cash at these rates. and so on. You can also borrow at these rates in each period.
You can short sell bonds and forward contracts. If you short sell a bond and don’t cover your position, then you will have to pay any coupons and/or face value on that bond at the end of the period. If you short sell a forward, you will have to deliver the underlying bond when the forward matures. Note that when you trade a forward contract, no money changes hands.
Prices in this case are determined by the traders, so all trades will take place at bids and asks that either you or another trader in the system puts in. The price you bid/ask for a forward contract is the forward price.
Case Data
The cash flows/security settlement from the bonds are:
|
Payout at end of Period 1 |
Payout at end of Period 2 |
Payout at end of Period 3 |
|
|
Cp Bond |
10 |
10 |
110 |
|
Zero C1 |
100 |
0 |
0 |
|
Zero C2 |
0 |
100 |
0 |
|
Zero C3 |
0 |
0 |
100 |
|
ZCFwd2 |
Long gets 1 Zero C2 pays Forward Price in cash |
||
|
ZCFwd3 |
Long gets 1 Zero C3 pays Forward Price in cash |
Trading Objective
Your aim is to make as much money as you can.
Sample Trading Screen
Case Objective
To understand the concept of duration and how the bond immunization theorem is applied.
Key Concepts
Duration; interest rate risk; bond immunization theorem
Case description
There are 4 fixed-income securities. You only trade for one period, though the securities have cash flows up to four periods in the future. The cash flow from each bond at the end of each period is shown below. You start with a negative (short) position in either the third or the fourth security, and can only trade the first two securities.
The yield curve is initially flat 25%. After one period, it shifts either up or down, in a parallel fashion. Your position at the end of the period is marked at the new yield curve, and this determines your performance.
Prices in this case are determined by the traders, so all trades will take place at bids and asks that either you or another trader in the system puts in.
Case Data
The cash flows from the securities are:
|
Payout at end of Period 1 |
Payout at end of Period 2 |
Payout at end of Period 3 |
Payout at end of Period 4 |
|
|
Sec 1 |
0 |
160 |
200 |
250 |
|
Sec 2 |
30 |
100 |
47 |
0 |
|
2YrZer |
0 |
100 |
0 |
0 |
|
3YrZer |
0 |
0 |
100 |
0 |
Trading Objective
Your aim is to hedge the risk of your position to parallel shifts in the yield curve.
Sample Trading Screen
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