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 valuing short maturity zero coupon bonds (Russian GKO’s) from an interest rate tree.
Key Concepts
Term structure of interest rates; interest rate risk; unbiased expectations; risk premium
Case description
There are 3 zero-coupon bonds maturing 1-month, 2-month and 3-months from the present time. Future 1-month spot interest rates are large and quite volatile. Possible spot rate movements can be accurately represented by the following interest rate tree:
That is, the initial spot rate is 6.5% for 1-month (i.e., not annualized). At the beginning of month-2 the realized 1-month spot rate can change to 5%, 9% or 11% etc., (equally likely). You can trade any security.
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. Finally, borrowing and short sales are permitted.
Case Data
The cash flows from the securities are:
|
|
Payout at end of Month 1 |
Payout at end of Month 2 |
Payout at end of Month 3 |
|
GKO-1 |
100 |
0 |
0 |
|
GKO- 2 |
0 |
100 |
0 |
|
GKO-3 |
0 |
0 |
100 |
Trading Objective
Your aim is to earn as much cash as possible.
Sample Trading Screen
Case Objective
The same as trading case B05 except now traders can get private information about future spot rates.
Key Concepts
Term structure of interest rates; informational efficiency/rational expectations; information and the shape of the term structure of interest rates; unbiased expectations, liquidity premium
Case description
There are 3 zero-coupon bonds maturing 1-month, 2-month and 3-months from the present time. Future 1-month spot interest rates are large and quite volatile. Each zero-coupon bond pays $100 at the the time of its maturity. Possible spot rates are accurately represented by the following interest rate tree:
That is, the initial spot rate is 6.5% for 1-month (i.e., not annualized). At the beginning of month-2 the realized 1-month spot rate can change to 5%, 9% or 11% etc., (equally likely). You can trade any security.
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. Finally, borrowing and short sales are permitted.
Private Information
Each month the spot rate of interest can undergo a high (x), middle (y) and low change (z). You may receive private information at the beginning of a month in a form (e.g., "Not y") that lets you eliminate a spot rate from being feasible. The private information is randomly assigned such that the market as a whole knows more than any trader’s private information reveals.
Trading Objective
Your aim is to earn as much cash as possible.
Sample Trading Screen
Introduction
This is the same as trading case B05 except that two new markets are opened which are interest rate forward contracts.
Case Objective
To understand valuing short maturity zero coupon bonds (Russian GKO’s) and interest rate forward contracts from an interest rate tree.
Key Concepts
Term structure of interest rates; interest rate risk; unbiased expectations; risk premium
Case description
There are 3 zero-coupon bonds maturing 1-month, 2-month and 3-months from the present time, and two forward contracts maturing at the end of months 1 and 2. Each forward is settled for a GKO with 1-month time to maturity (i.e., 2-month GKO and 3-month GKO respectively). Future 1-month spot interest rates are large and quite volatile. Possible spot rate movements can be accurately represented by the following interest rate tree:
That is, the initial spot rate is 6.5% for 1-month (i.e., not annualized). At the beginning of month-2 the realized 1-month spot rate can change to 5%, 9% or 11% etc., (equally likely). You can trade any security.
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. Finally, borrowing and short sales are permitted.
Case Data
The cash flows and settlement details from the securities are:
|
|
Payout at end of Month 1 |
Payout at end of Month 2 |
Payout at end of Month 3 |
|
GKO-1 |
100 |
0 |
0 |
|
GKO- 2 |
0 |
100 |
0 |
|
GKO-3 |
0 |
0 |
100 |
|
T-BFwd2 |
Forward price is exchanged for 1-unit of GKO-2 |
|
|
|
T-BFwd3 |
|
Forward price is exchanged for 1-unit of GKO-3 |
|
Trading Objective
Your aim is to earn as much cash as possible.
Sample Trading Screen
Case Objective
The same as trading case B07 except now traders can get private information about future spot rates.
Key Concepts
Term structure of interest rates; informational efficiency/rational expectations; information and the shape of the term structure of interest rates; unbiased expectations, liquidity premium
Case description
There are 3 zero-coupon bonds maturing 1-month, 2-month and 3-months from the present time, and two forward contracts maturing at the end of months 1 and 2. Each forward is settled for a GKO with 1-month time to maturity (i.e., 2-month GKO and 3-month GKO respectively). Future 1-month spot interest rates are large and quite volatile. Possible spot rate movements can be accurately represented by the following interest rate tree:
That is, the initial spot rate is 6.5% for 1-month (i.e., not annualized). At the beginning of month-2 the realized 1-month spot rate can change to 5%, 9% or 11% etc., (equally likely). You can trade any security.
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. Finally, borrowing and short sales are permitted.
Private Information
Each month the spot rate of interest can undergo a high (x), middle (y) and low change (z). You may receive private information at the beginning of a month in a form (e.g., "Not y") that lets you eliminate a spot rate from being feasible. The private information is randomly assigned such that the market as a whole knows more than any trader’s private information reveals.
Case Data
The cash flows and settlement details from the securities are:
|
Payout at end of Month 1 |
Payout at end of Month 2 |
Payout at end of Month 3 |
|
|
GKO-1 |
100 |
0 |
0 |
|
GKO- 2 |
0 |
100 |
0 |
|
GKO-3 |
0 |
0 |
100 |
|
T-BFwd2 |
Forward price is exchanged for 1-unit of GKO-2 |
||
|
T-BFwd3 |
Forward price is exchanged for 1-unit of GKO-3 |
Trading Objective
Your aim is to earn as much cash as possible.
Sample Trading Screen
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