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 Objectives
To understand how to hedge the price risk from option trading activities by applying the principle of delta hedging. To gain experience with using real world option support systems. To try out different greek based option trading strategies such as delta hedging and portfolio insurance (synthetic put).
Key Concepts
Delta hedging and trading in a world where prices evolve in continuous time but trading takes place at discrete points in time (every week). Trading takes place in an idealized constant volatility world. You get to adjust your position at realized weekly prices.
Case description
In this case, there is a stock market, a treasury strip market and four option markets defined on the stock. Stock prices evolve in continuous time with the following characteristics: volatility 0.30 per annum, spot price is approximately $347, drift is 5%, and 1-week of calendar time corresponds to 15-seconds of FTS time. The market lasts for six calendar months. Trading takes place in discrete time (once a week only) at the prevailing prices. You cannot make market in ST1.
You can buy or sell in the Treasury strip market. At the end of 6-months you must cover the strips for $900 if short or you receive $900 if long. There are four option markets: strikes 320 and 360. One put and one call is traded at each strike price. You cannot trade options in this market. Instead you must manage price risk by trading the stock and the bond.
Holding cash pays zero interest in ST1 (i.e., your checking account pays zero interest). You can earn interest on any excess cash by holding a long position in bonds.
Trading Objective
Your goal is to lock in a trading profit of approximately $53,500 market cash and then earn as much grade cash as possible. Below $45,000 market cash you earn zero grade cash. Above this amount you earn an increasing amount of grade cash (from $6 to $10 where $10 corresponds to $200,000 market cash).
Sample Trading Screen
The above trader type has a short position in the Call 320 that cannot be traded. An example of your real time trading support window is also provided above.
Case Introduction
Suppose your firm is making market in some stock. You are responsible for managing the exposure created from the irregular order flow generated from this activity. That is, your net stock inventory can fluctuate from long to short during each trading trial and your task is to manage this risk by trading options. You are not permitted to trade in the underlying stock.
Key Concepts
Delta and gamma hedging in a world where prices evolve in continuous time but trading takes place at discrete points in time (every week). Trading takes place in an idealized constant volatility world.
Case description
In this case, there is a stock market, a treasury strip market and four option markets defined on the stock. Stock prices evolve in continuous time with the following characteristics: true volatility of underlying is 0.30 per annum, spot price is approximately $347, drift is 5%, and 1-week of calendar time corresponds to 30-seconds of FTS time. Trading takes place in discrete time (once a week only) at the prevailing prices and you cannot trade stocks.
You can buy or sell in the Treasury strip market. At the end of 6-months you must cover the strips for $900 if short or you receive $900 if long. There are four option markets: strikes 320 and 360. One put and one call is traded at each strike price. In ST2 you can make market in the strike 360 options and take market in the strike 320 options. You cannot trade the underlying stock.
Holding cash pays zero interest in ST1 (i.e., your checking account pays zero interest). You can earn interest on any excess cash by holding a long position in bonds.
Trading Objective
Below $45,000 market cash you earn zero grade cash. Above this amount you earn an increasing amount of grade cash (from $6 to $10 where $10 corresponds to $200,000 market cash).
Sample Trading Screen
The above trader type has a short position in the Call 320 that can be traded. The only security that cannot be traded is the underlying stock position. Your trading support windows are also provided above. You get real time delta/gamma/theta/vega information. In addition, by clicking on the option name in the Option Support window you can update your calculator support screen with the latest prices. You can also use this calculator to help you make market in the options. The underlying will tick every 30-seconds and you can withdraw your option quotes at any time via the Limit Order Book. To see the limit order book (and keep it open at all times) click on Support and select Limit Order Book at the beginning of the market. To Withdraw your quote simply click on your quote (denoted with an asterisk) to highlight it and then click on Withdraw.
Case Objective
To understand using options and futures to manage currency risk; to understand options trading strategies.
Key Concepts
Currency option and futures pricing; option hedge parameters.
Case description
Exchange rates are known to exhibit periodic "jumps," i.e., sharp movements over a short period of time. In the case, the currency is the German mark. You can trade several options and a futures contract on the mark. You will have an initial position in options and in a zero-coupon bond. You can therefore implement trading strategies to take advantage of the jumps in the exchange rate or you can try to hedge your position. However, you don’t know whether the exchange rate will jump up or down, when the jumps will occur, or the magnitude of the jumps. You can use the option support system to see the delta and gamma of your position in real time. You can also use it to calculate implied volatilities.
Prices in this case are fixed, and are based on historical exchange rate information.
Case Data
We trade in units of 500 marks. The volatility of the exchange rate is 15%. There are four options, a put and call with strike 290 and a put and call with strike 310. You cannot trade the option you have an initial position in. There is a futures contract on the mark. All derivative contracts at the end of the trading period, which is one year. However, time moves forward, so when half the trial is over, the time to maturity is half a year. The domestic interest rate is 3% while the German interest rate is 7%.
Trading Objective
Your aim is to make as much money as you can.
Sample Trading Screen
Case Objective
To understand using options and futures to manage currency risk; to understand options trading strategies in an environment in which exchange rate crises exist. In the 1992 European Currency Crisis implied volatilities for currency options climbed to in excess of 20% per annum.
Key Concepts
Currency option and futures pricing; option hedge parameters; implied volatility shifts.
Case description
Exchange rate volatilities are known to exhibit periodic "shifts," i.e., movements over a short period of time. In the case, the currency is the German mark. By using the calculator support system to compute implied volatilities you can detect if a shift is occurring. You can trade several options and a futures contract on the mark and will have an initial position in options and in a zero-coupon bond. You can therefore implement trading strategies to take advantage of shifts in the volatility of exchange rates or you can try to hedge your position. You can use the option support system to see the delta and gamma of your position in real time as well as to calculate implied volatilities.
Prices in this case are fixed, and are based on historical exchange rate information.
Case Data
We trade in units of 500 marks. The volatility of the exchange rate is 12%. There are four options, a put and call with strike 280 and a put and call with strike 320. There is a futures contract on the mark. All derivative contracts at the end of the trading period, which is one year. However, time moves forward, so when half the trial is over, the time to maturity is half a year. The domestic interest rate is 3% while the German interest rate is 7%.
Trading Objective
Your aim is to make as much money as you can.
Sample Trading Screen
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