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 one-period binomial option pricing model.
Key Concepts
Binomial option pricing model; option replication.
Case description
There is one stock, one bond, a put option and a call option. The market lasts for one period. The stock price is initially 20, and at the end of the period, it either goes up to 40 or down to 10. The interest rate for the period is 1%. Both options expire at the end of the period, and have a strike price of 25.
Prices for the stock are fixed at 20. The other prices are determined by the traders, so such trades will take place at bids and asks that either you or another trader in the system puts in.
Case Data
The following one-period binomial tree shows the cash flows from each security at the end of the period depending on whether the stock goes up or down:
Trading Objective
Your aim is to maximize the amount of money you make.
Sample Trading Screen
Case Objective
To understand the two-period binomial option pricing model.
Key Concepts
Binomial option pricing model; option replication; dynamic trading strategies.
Case description
There is one stock, one bond, a put option and a call option. Both options are American style options. The market lasts for two periods. The stock price is initially 20, and at the end of the period, it either goes up to 40 or down to 10. At the end of the second period, the stock value can either go to double or halve. The interest rate each period is 1%. Both options expire at the end of the period, and have a strike price of 25.
Prices for the stock are fixed at 20 initially, and then at at either 40 or 10 in period 2, depending on whether an uptick or downtick occurs. The other prices are determined by the traders, so such trades will take place at bids and asks that either you or another trader in the system puts in.
Case Data
The following binomial tree shows the cash flows from each security at the end of period 2. There are no cash flows in period 1.
Trading Objective
Your aim is to maximize the amount of money you make.
Case Objective
To understand delta hedging in the binomial option pricing model.
Key Concepts
Binomial option pricing model; option replication; dynamic trading strategies.
Case description
There is one stock, one zero-coupon bond, a put option and a call option. Both options are European style options. The market lasts for three periods. The stock price is initially 400. The uptick parameter is 1.090 and the downtock parameter is 0.917. The interest rate each period is 1%. Both options expire at the end of the third period, and have a strike price of 410.
Prices for the stock are fixed at 400 initially, and then follow the binomial process. You are endowed with an initial short position in one of the two options and a positive amount of cash.
Case Data
The following table shows the cash flows from each security at the end of period 3 depending on the number of upticks and downticks that occur. Thus, "udd" in the table means that there was an uptick followed by two downticks. There are no cash flows in intermediate periods.
|
uuu |
uud |
udu |
udd |
duu |
dud |
ddu |
ddd |
|
|
Stock |
518.01 |
435.8 |
435.8 |
366.63 |
435.8 |
366.63 |
366.63 |
308.44 |
|
Bond |
103 |
103 |
103 |
103 |
103 |
103 |
103 |
103 |
|
Put |
0 |
0 |
0 |
43.37 |
0 |
43.37 |
43.37 |
101.56 |
|
Call |
108.01 |
25.8 |
25.8 |
0 |
25.8 |
0 |
0 |
0 |
Trading Objective
Your aim is to hedge the risk of your option position by trading the stock and the bond.
Sample Trading Screen
Case Objective
In this case you will trade European options in a two-period market with price discovery of both the underlying security and the risk-free bond.
Key Concepts
Binomial option pricing, European options, put-call parity, price discovery.
To understand the two-period binomial option pricing model.
Case description
Four markets are open for two calendar months of actual time. In FTS time, a one month trading period will lasts for x seconds (the default time for this case is 240 seconds).
The markets are: a stock market, a bond market, and two option markets (put and call). In the stock market at the end of each calendar month either an "uptick" (u) or "downtick" (d) is realized for the stock price with the probability of u equal to 0.5. The set of possible realized paths is depicted below:
Prices for the stock are fixed at 20 initially, and then at at either 40 or 10 in period 2, depending on whether an uptick or downtick occurs. The other prices are determined by the traders, so such trades will take place at bids and asks that either you or another trader in the system puts in.
Case Data
The following binomial tree shows the cash flows from each security at the end of period 2. There are no cash flows in period 1.
Trading Objective
Your aim is to maximize the amount of money you make.
Sample Trading Screen
Case Objective
To understand the one-period binomial option pricing model.
Key Concepts
Binomial option pricing model; option replication.
Case description
There is one stock, one bond, a put option and a call option. The market lasts for one period. The stock price is initially 20, and at the end of the period, it either goes up to 40 or down to 10. The interest rate for the period is 1%. Both options expire at the end of the period, and have a strike price of 25.
All prices are determined by the traders, so such trades will take place at bids and asks that either you or another trader in the system puts in.
Case Data
The following one-period binomial tree shows the cash flows from each security at the end of the period depending on whether the stock goes up or down:
Trading Objective
Your aim is to maximize the amount of money you make.
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