invgame5 _from home2008_

invgame5 _from home2008_ - N Sheflin INVESTMENT GAME ROUND...

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N. Sheflin INVESTMENT GAME ROUND 5 DERIVATIVES Time to get risky (or not) with derivatives. Highly leveraged, used for hedging, arbitrage and speculation, best used by professionals. We’ll just look at simple futures and options. READ about derivatives at: http://www.investopedia.com/university/futures/ (at least thru section 2) http://www.investopedia.com/university/options/ and a bit on Black-Scholes http://www.pbs.org/wgbh/nova/stockmarket/formula.html In VIRTUAL STOCK EXCHANGE nothing to do – doesn’t support options or future trading. HOW IS YOUR PORTFOLIO DOING? Determine your paper gain/loss and explain the causes. Compare with the performance of the S&P 500. End is almost here. PROBLEMS? If VSE is behaving oddly (or even if not), it’s a good idea to keep a paper record of all transactions (purchases/sales). At worst, you can hand in a corrected version of your actions at the end of the game. APPLICATION Go to http://www.optionstoolbox.com/f/option_calculator and price IBM Calls of October 2010 with a strike price of: 135 -enter IBM symbol in place of QQQ and then enter strike price of 135 and expiration date of Oct 10 from drop down menu How much will the option cost you? Why does the option have any value since IBM is selling for less than the strike price? What is meant by the strike price? Why do the other parameters (settings) matter? And how (try changing some and see what happens)?
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QUESTIONS FOR FINAL hide answers, try explaining to your cat ; look up in invest-faq, investor words, etc; ask in class; 1. What is a derivative? Asset whose value derives from another, underlying asset A Futures Contract? Contract which requires the purchase or sale of a standardized commodity, currency, interest rate or index bundle at a specified date in the future at a price set today. A Call Option? Option to buy in the future, up to an expiration date, at a price set today A Put Option? Option to sell 2. What is primary economic role of derivatives? Hedging (offsetting) of risk; farmer can short pork bellies
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invgame5 _from home2008_ - N Sheflin INVESTMENT GAME ROUND...

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