International Risk Analysis and Forecasting An Experiential (PowerPoint)

							   Market Risk Analysis and
         Forecasting

An Experiential Approach to Financial Economics




              Session 1
      “Getting Started with FTS”
                    Prof. Jim Forest
                 Department of Finance
                University of Connecticut
            Class Session 1
• In this session we will get acquainted with the
  FTS real-time trading system.
• Students will participate in a semester-long
 trading competition in one of the below markets:
      1. Dow 30 Stocks
      2. Treasury Bonds and Fed Funds Futures
• Each case involves … participants
            Initial Parameters
• Trading Costs: $9.99 per trade

• Initial Funds: $1 Million “Cyber dollars”

• Your Goal: Outperform your peers over the term
  (you need to start building a strategy right away)

Hint: Never marry a trading strategy or security!!
       Goals of This Session
• To introduce the trading interface

• To engage in our first trades

• To offer initial suggestions of basic
  strategies you may want to experiment
  with in the early stages of the semester
           The FTS Interface
              Getting Our “Feet Wet”

• We will take you on a quick tour of the basics of
  the FTS real-time

• Note: You should download, print and read the
  real-time trading manual to learn more details of
  the trading capabilities of FTS

• You may enter any strategy the system will allow
  of you!!!
            Starting Up FTS
• Step 1. Run the FTS System Manager and
  select the FTS Real Time Trader Client (as
  shown below).
      Getting Into the System
• Step 2. Launching
  the FTS Real Time
  Trader Client: Click
  on Run Selected
  Application using the
  button below FTS
  Real Time Trader
  Client
• Now you are in the
  system!!!
       Enter Appropriate Data
• Select Language: Select a language
  preference
• Select Pre-specified Server: Select the
  appropriate server
• IP Address of Server: Enter your IP Address or
  proxy
• Port Number: Leave this field as it is unless
  directed otherwise
• Trading Name: Enter your assigned trading
  name
• Password: Enter your assigned password
The Main Window
        The Support Window
• Notice the upper
  right-hand window

• Support Window:
  The Support Window
  contains all of your
                          TIP: The Second Tab has a drop-down
  support pages,             that allows you to choose support
  including access to    options such as Bloomberg, Yahoo, and
                            the Fed websites. After we select a
  web information.             security, you can check it out!!!
  Analytical Support & Reports
             Window:
• This window displays
  reports and analytical
  support both of which
  are controlled by the
  two drop down menus
  located at the top of
  the window (defaults -
  US Dollar and Select
  Analytics).
                Tabs Window:

• This window contains the
  following three tabs:
• Login to Server:
  Displays login details
• Trade Securities:
  Displays a screen that
  allows you to submit
  markets orders for all of
  the tradable securities in
  the case
      Reports Window:

This window displays the securities that are
          available to be traded.
          Activity One:
         Your First Trade
We will start by taking a long position in any
        one security of your choice.

Go long one unit only after a short break to
        allow you a little research

           Suggestion: Buy Low

     (But how do I know what is low??)
 10 Minute Break for Research
• Take some time to research one or more
  securities – Build a strategy for a long
• Perhaps a technical analysis strategy
  would be a basis as we have just
  scratched the surface.
• If you are in the Dow case, you may want
  to use a metric such as PE ratio.
Discussion Session

What did you do for your first
          trade?
       Managing Risk

    “Pulling out the stops”

     Remember: A Stop Loss Order…

…Is a special limit order to sell below (buy
above) the current price on a long (short)
                 position
                      Stop Orders
Any combination of buy or sell stop orders can be submitted by selecting the
appropriate radio control.

Above you enter your price and quantity.

The stop order specifies the price or “worse” that you want to transact at.

This order type is used to close out a trade if the market moves against you.
        Safer to Use Protection!!!
• At this point I want you to decide on whether or
  not to use a stop order to manage the risk of
  your long position.

• Note: If you set the stop too close to the current price you run the
  risk of being “stopped out.” This can be a problem in a volatile
   market as you are   selling low!!


    • This is an example of TRADING RISK
Activity 2. Stop Time

   Two Minute Break:
   Enter a stop order
     Discussion Session

  What determined the stop out price for you?

  Note: When you have a stop order out…
…you don’t want to be away from the market for
                  too long!!!!

This is why your spouse the trader worries about
             the yen during dinner!!!

You are now happily married to the market and
         your spouse…Polygamy!!!
     Other Trade Possibilities
• Limit Buy Order – This is when you are
  interested in a long position for a given
  security, but below the current price
• Short Sale – Again, this is a strategy to
  profit on a price decline.

We could also conjure up other strategies…
• Limit Short Sale???
• Stopping out of a Short Position???
                Limit Short Sale
• I might want to enter into this trade when a security takes
  a big jump in price.

Imagine One Situation:
A hedge fund manager uses a programmed trading
  strategy to capitalize on reversals to large price swings.
  She programs a limit order to short sell 10 shares of IBM
  if the price rises to two standard deviations above the
  current trade.

She is betting that, if the market jumps by that large a step,
  it will retrace from that level.
      Stopping Out of a Short
Question:
• When might I want to enter into this trade?

Answer:
• When I have a short position that I want to
  cover against a big rally (sharp increase)
  in the price.
        Imagine One Situation:
Magic Jack has just shorted a bunch of Euro based on his
  trading model. Jack doesn’t usually pay attention to
  fundamentals but his friend Professor Jim warns him that
  ECB is meeting today and may surprise the market with
  a rate hike!!!

Jack doesn’t want to cancel the trade but he wants to get
  some protection in the event that the Professor’s fears
  are realized.

Jack places a stop order on his short Euro position
  (converting it to dollars) at one standard deviation above
  the current price

                   Just to Be Safe!
             Your Turn!!!
• You are now equipped with some basic
  trading knowledge from which to develop a
  strategy to outperform your peers.
• Advice: Given that we are just starting,
  start of with small positions.
• Suggestion: Stay at least 50% in cash for
  the first couple weeks until we have some
  more tools in our tool chest and have
  performed more research in our market.