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 concepts that underlie mean-variance portfolio efficiency; to learn how to select and trade to an efficient portfolio.
Key Concepts
Portfolio risk and return; Markowitz diversification; efficient frontier
Case Description
The case has 6 stocks: American Express (AXP.N), DuPont (DD.N), Disney (DIS.N), Dow Chemical (DOW.N), Kodak (EK.N), and General Electric (GE.N). You will start with an initial position in the stocks. You can trade (i.e., buy or sell) the stocks at the prices shown for one trading period. One trading period corresponds to one week. At the end of the week, a new price will be realized, based on the distribution of returns given below. Your portfolio value at these new prices will then determine your return. The interest rate on cash is -100%, so you should invest all your money in the stocks. Borrowing is not allowed.
Case Data
Based on data from 1990 to 1996, the closing prices and average weekly returns of the 6 stocks were:
|
AXP.N |
DD.N |
DIS.N |
DOW.N |
EK.N |
GE.N |
|
|
Closing Price |
46.9 |
80.1 |
65.0 |
79.6 |
75.5 |
79.8 |
|
Average Return |
0.00365 |
0.00333 |
0.00401 |
0.00245 |
0.00276 |
0.0041 |
The covariance of returns was:
|
AXP.N |
DD.N |
DIS.N |
DOW.N |
EK.N |
GE.N |
|
|
AXP.N |
0.00139 |
0.00028 |
0.00021 |
0.00034 |
0.00024 |
0.00034 |
|
DD.N |
0.00028 |
0.00088 |
0.00021 |
0.00048 |
0.00009 |
0.00041 |
|
DIS.N |
0.00021 |
0.00021 |
0.00102 |
0.00016 |
0.00004 |
0.0002 |
|
DOW.N |
0.00034 |
0.00048 |
0.00016 |
0.00093 |
0.00003 |
0.00029 |
|
EK.N |
0.00024 |
0.00009 |
0.00004 |
0.00003 |
0.00114 |
0.00017 |
|
GE.N |
0.00034 |
0.00041 |
0.0002 |
0.00029 |
0.00017 |
0.00071 |
Trading Objective
Your aim is to maximize your return at the same time minimizing your risk.
Sample Trading Screen
Case Objectives
To understand mean-variance portfolio efficiency; to learn how prices of risky assets are determined in a market; to understand the market that is modeled using the CAPM.
Key Concepts
Capital market line; diversification; efficient frontier; price discovery.
Case Description
The case has 3 companies: Company 1, 2 and 3. (GE.N). You will start with an initial position in the three companies. You can trade (i.e., buy or sell) the stocks of these companies for one trading period. At the end of the trading period, you earn or pay interest on cash at 12%. After interest is settled, one of 10 path of the economy is realized. Each path determines a value for each company, and your portfolio is market to market at these values. The set of paths and associated values is shown in the table below, where each possible path is equally likely. You are allowed borrow cash (at 12%) and also short sell stocks. If you short sell a stock and don’t cover your position, then you will have to pay the realized value 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 possible paths for the economy, and the corresponding end-of-period realized values for the three companies are shown here. The average value is also shown.
|
Path |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Average |
|
Co. 1 |
5 |
5 |
5 |
24 |
25 |
30 |
32 |
68 |
75 |
75 |
34.4 |
|
Co. 2 |
4 |
5 |
10 |
21 |
66 |
65 |
65 |
20 |
20 |
20 |
29.6 |
|
Co. 3 |
55 |
55 |
49 |
22 |
22 |
20 |
10 |
10 |
10 |
10 |
26.3 |
Trading Objective
Your aim is to maximize your return at the same time minimizing your risk.
Sample Trading Screen
Case Objective
To understand the implications of CAPM for portfolio management
Key Concepts
Capital market line; market portfolio; beta’s; diversification; efficient frontier.
Case Description
The case has 3 companies: Company 1, 2 and 3. (GE.N). You will start with an initial position in the three companies. You can trade (i.e., buy or sell) the stocks of these companies for one trading period. At the end of the trading period, you earn interest on cash at 12%. After interest is settled, one of 10 path of the economy is realized. Each path determines a value for each company, and your portfolio is market to market at these values. The set of paths and associated values is shown in the table below, where each possible path is equally likely. You are not allowed to borrow cash but can short sell stocks. If you short sell a stock and don’t cover your position, then you will have to pay the realized value at the end of the period.
Prices in this case are fixed, so you cannot bid or ask. The prices are:
|
Company |
Price |
|
Co. 1 |
28 |
|
Co. 2 |
26 |
|
Co. 3 |
25 |
Case Data
The possible paths for the economy, and the corresponding end-of-period realized values for the three companies are shown here. The average value is also shown.
|
Path |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Average |
|
Co. 1 |
5 |
5 |
5 |
24 |
25 |
30 |
32 |
68 |
75 |
75 |
34.4 |
|
Co. 2 |
4 |
5 |
10 |
21 |
66 |
65 |
65 |
20 |
20 |
20 |
29.6 |
|
Co. 3 |
55 |
55 |
49 |
22 |
22 |
20 |
10 |
10 |
10 |
10 |
26.3 |
Trading Objective
Your aim is to maximize your return at the same time minimizing your risk.
Sample Trading Screen
Case Objective
To understand the implications of risk aversion in the diversification
Key Concepts
Risk loving behavior; capital market line; market portfolio
Case Description
The case has 3 companies: Company 1, 2 and 3. (GE.N). You will start with an initial position in the three companies. You can trade (i.e., buy or sell) the stocks of these companies for one trading period. At the end of the trading period, you earn or pay interest on cash at 12%. After interest is settled, one of 10 path of the economy is realized. Each path determines a value for each company, and your portfolio is market to market at these values. The set of paths and associated values is shown in the table below, where each possible path is equally likely. You are allowed borrow cash (at 12%) and also short sell stocks. If you short sell a stock and don’t cover your position, then you will have to pay the realized value 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 possible paths for the economy, and the corresponding end-of-period realized values for the three companies are shown here. The average value is also shown.
|
Path |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Average |
|
Co. 1 |
5 |
5 |
5 |
24 |
25 |
30 |
32 |
68 |
75 |
75 |
34.4 |
|
Co. 2 |
4 |
5 |
10 |
21 |
66 |
65 |
65 |
20 |
20 |
20 |
29.6 |
|
Co. 3 |
55 |
55 |
49 |
22 |
22 |
20 |
10 |
10 |
10 |
10 |
26.3 |
Trading Objective
Your aim is to maximize your return. However, you are rewarded for taking on risk.
Sample Trading Screen
Case Objectives
To understand mean-variance portfolio efficiency; to learn how to manage risk using stock index futures.
Key Concepts
Capital market line; diversification; efficient frontier; price discovery.
Case Description
The case has 3 companies: Company 1, 2 and 3. (GE.N). You will start with an initial position in the three companies. You can trade (i.e., buy or sell) the stocks of these companies for one trading period. At the end of the trading period, you earn or pay interest on cash at 12%. After interest is settled, one of 10 path of the economy is realized. Each path determines a value for each company, and your portfolio is market to market at these values. The set of paths and associated values is shown in the table below, where each possible path is equally likely. You are allowed borrow cash (at 12%) and also short sell stocks. If you short sell a stock and don’t cover your position, then you will have to pay the realized value 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 possible paths for the economy, and the corresponding end-of-period realized values for the three companies are shown here. The average value is also shown.
|
Path |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
Average |
|
Co. 1 |
5 |
5 |
5 |
24 |
25 |
30 |
32 |
68 |
75 |
75 |
34.4 |
|
Co. 2 |
4 |
5 |
10 |
21 |
66 |
65 |
65 |
20 |
20 |
20 |
29.6 |
|
Co. 3 |
55 |
55 |
49 |
22 |
22 |
20 |
10 |
10 |
10 |
10 |
26.3 |
You can buy or sell shares in company 1 at $28, company 2 at $26, and company 3 at $25.
Trading Objective
Your aim is to maximize your return at the same time minimizing your risk.
Sample Trading Screen
(C) Copyright 1999, OS Financial Trading System