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BADM 7090 FTS Case RE1

BADM 7090 FTS Case RE1 - FTS Trading Case RE1 Updated...

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1 FTS Trading Case RE1 Updated: January 4, 2011 C:\Class Material\BADM 7090\Assignments\SMART Lab Assignment\BADM 7090 FTS Case RE1.doc Description of the Case Note: If you miss class on the day of this exercise, you will have to write a paper to receive full credit. See me for details. The case is an exercise in trading stocks in a market with other participants, each of whom has different information. The market consists of two stocks, representing companies known as ABC and CRA. Each exercise is called a trial and each trial takes place over two five-minute periods. The outcomes are random and are revealed at the end of each period. Depending on the outcome, each company pays a dividend of $0, $12, or $24. The amounts of the dividends depend on which economic outcome or state of nature occurs. Everyone starts with an initial endowment of cash of $5,000. The interest rate is 0%, indicating that time value of money is not an issue. All market participants can borrow or lend at this 0% interest as well as short sell either stock if so desired. Holders of stock receive dividends. Short sellers are charged dividends. Market participants receive analyst information that tells them something about the events that will occur. Participants are expected to use this analyst information to determine the prices they would pay or ask for each stock. As in a real market, no trading can take place and no prices will exist until market participants engage in transactions. The class period will begin with an overview of the process and a practice exercise. Then we will engage in the actual trading and do as many trials as possible during the allotted time. In all likelihood, we will use only one of these companies for trading. Both are covered in this document because at some time today or in the future, I may use the other or both companies. Trading Objective The purpose of the exercise is to make as much money as possible, which depends on how well you trade with your classmates. The “grade” is based upon the grade cash, which is calculated as 0.0001 multiplied by the closing balance of market cash. The grade cash is cumulative across trials. The primary purpose of the assignment, however, is to participate, experience a market environment, and learn how the actions of market participants determine prices. You are not graded on how much money you make. Everyone who participates and does at least one trade receives full credit.
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2 Events & Dividends The possible outcomes are shown below. The firms compete in independent markets, and therefore the events affecting the firms are not related. The following tables describe the possible events and dividends for each equally likely event. ABC Event Description Dividend x Poor economic conditions, labor strike 0 y Poor economic conditions, no labor strike 12 z Fair economic conditions, good labor relations 24 CRA Event Description Dividend w Poor economic conditions, labor strike 0 x Poor economic conditions, no labor strike 12 y Fair economic conditions, no strike 12 z
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