Virtual Trading

Assignment

A Management Primer Financial Derivatives

CCSU Portfolio Management and Risk Management, LLC

Fall 2010

Dunnia Ulloa

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Virtual Trading Assignment

This report provides the details and explanations for the trades executed during August 30th

through November 15th

of 2010. The purchase of stock, options and futures were done

through the School of Business Trading System (http://ccsu.stocktrak.com)

Trading information:

Job: Director of the Investments & Risk Management Department

Value of assets under your control: $100,000,000

Clients

Coca-Cola Co.

Home Depot Inc.

Intel Corp.

Kraft Foods Inc. Currently they have 500,000 bu of corn in inventory (going long)

McDonald's Corp.

Wal-Mart Stores Inc. Currently they have 12,500,000 Euros (going long)

Prof. Finance A wealthy Finance Professor who doesn't know how to manage his $10,000,000 portfolio.

Currently he has:10,000 shares invested in stock number 1 in your stocks list (Long).

A short selling position of 5,000 shares in stock number 2 in your stocks list. (This is not "going short" it is a short

sell)

The details and explanations for each part of the assignment as requested by the client are

described below. (Trades canceled by the user are not shown below. The transactions have been separated by

months)

A U G U S T

Trades Requested by Client

The client Prof. Finance has 5,000 shares in stock number 2. In addition he has 10,000 shares

invested in stock number 1. Client, Wal-Mart Stores Inc., has 12,500,000 Euros (going long).

Also client, Kraft Foods Inc., has 500,000 bu of corn in inventory (going long).

Stocks List

1) 3M Co. (MMM)

2) Agilent Technologies, Inc. Comm. (A)

3) Abercrombie & Fitch Company (ANF)

4) Ball Corporation Common Stock (BL)

Execution of Trades Requested:

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Description; Discussion &

Expectations

Trades made during the month of

October where schedule as part of the

start of the portfolio. 3M Co. (C) was

completed for Prof. Finance who has

10,000 shares invested in stock number

1. 3M Co. had a stock price of $79.65.

To the left is a snapshot of their stock

price from April to August 30th

along

with their income statement. Looking

at their income statement and their

stock price and the companies

investment returns compared against

the industry returns I feel that it will be a good addition to the portfolio of Prof. Finance.

He also had a short sell position of

5,000 shares in stock number 2, Aglient

Technologies, Inc. Comm. (D) Aglient

Technologies, Inc. had a stock price of

$27.58 in August 30th

. With the short

sell the firm will benefit from a decline

in the price of the stock, however if the

stock rises the firm will be hurt and

incur a loss. I feel that having this transaction in the portfolio could hurt the firm. I say this

because Aglient Techonolgies has shown a steady income statement for the year of 2010 and

their investment returns compared to the industry is greater.

Aglient Technologies Investment Returns

Wal-Mart Store Inc, a client, had a position of 12,500,000 Euros going long (B) Due to the in

familiarity with how the Currency Market works it is hard to have an clear guide or

expectation of this transaction. Also, Kraft Foods Inc, another client, had 500,000 bu of corn

inventory, going long (A). This transaction is a great way for the client to protect against

rising prices of corn however due to the lack of knowledge of how the futures market works

it is hard to come up with a clear expectation for this transaction

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Results

D. The short sell position of the 5,000 shares in stock Aglient Technologies resulted hurting

the portfolio. Aglient had an

increase of $27 million in their

fourth quarter earnings from prior

quarter. In addition their stock price

rose from $27.58 to $36.35 in

November 26th

.

As a result there is a loss of

$40,7000 to the portfolio as of

November 26th.

C. The purchase of 10,000 shares

of 3M Co. resulted in a profit of

$47,400 to the portfolio. The

stock price of 3M increased to

$84.40 or $4.75 from $79.65.

This resulted from steady

earnings that the company has

had during 2010 their 3Q

earinings was lower than prior

quarter but that didn’t seem to

affect them much. In addition

their ROE compared is higher

when compared against the industry and the S&P 500.

3M Investment Returns

B. According to an article published in

Seeking Alpha “Going Long Euro Might

Not Be so Silly” a Daily Trading member

says that “Given how cheap deep out of

the money calls are on the Euro we think

it’s a reasonable speculation to go long

the Euro” The spot purchase of the Euros

resulted in a profit of $495,625. When

purchased the cost of the Euro was 1.27

and it increased to 1.31 or .04.

A. The purchase of the 500,000 bu of

corn for Krafts inventory also resulted in

a profit of $558,750

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Observations

The objective of the trades made to

begin the portfolio was a learning

experience from me. At first it was

confusing navigating the CCSU

Trading System but as more trades were

made it was easier to complete. I felt

comfortable executing the trades for 3M

and Agilent Technologies, the trades for

the spots was a bit confusing to

understand and how it works but it was

a great way to get exposure to different

investment vehicles available that I

never knew existed.

S E P T E M B E R

Trades Requested by Client

Prof. Finance would like to protect his 10,000 shares position in stock number 1 using

options expiring Dec 2010.

Kraft Foods Inc fears that the price of corn will fall in the next three months, and wants to

protect the value of its inventory using futures contracts expiring Dec 2010.

Execution of Trades Requested:

Description; Discussion & Expectations

H, G, F (Call Options) To protect the Prof. Finance 10,000 shares using options expiring

December 2010. I decided to first look at 3M stock price and their income statement (see

Income Statement from Page 1) as well as

other ratios to determine whether to go with

a call or a put option. The portfolio already

held 10,000 shares of 3M and the Price of

the stock continued to go up therefore I

decided to use a call option to profit from

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the increase in price. The transactions were done separately due to the small availability of

the contracts.

E To protect Kraft Foods a trade was using futures contract expiring in December 2010. A

Short position in the Futures market was executed to protect the client’s inventory from

falling prices. After viewing the

expected prices of corn for December

2010 in the CME Group website the

price of corn showed both signs of

increase and decrease of corn. It was

difficult to determine what would be

expected by December.

Results

H, G, F (Call Options) The result of the

call options made for 3M were a loss of

$29,947. This was due to the call option

being out of the money. The price of the

stock did go up however the strike price

was not correctly used. The price should

have been lower than $85, $80 or $70 to take advantage of the increase in the stock price (3M

has a current stock price of $84.40).

E The futures contract for corn resulted in a loss of $176,250 to the portfolio. This was a

result of the increase in price of corn.

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Observations

I realized that I shouldn’t have done a call option for 3M because the portfolio already had

10,000 shares that would benefit if the stock price goes up. Therefore I should have done a

put option that would allow me to hedge the position if the stock goes down. I would have

been able to make a profit if the price of the stock depreciated. I feel that instead I was

thinking with greed and not of the possible outcomes that would occur to the client’s

portfolio. I also realized that if I had chosen to go with a price range between 70 or 60 I

would have made a profit but instead I choose a price that was clearly out of the money.

For the futures transaction this is was a learning experience. It was difficult to follow the

transactions going on in the CME Group website. This has thought me of other ways that

companies can protect their inventory from other external sources that could affect the price

of their goods.

O C T O B E R

Trades Requested by Client

The finance professor wants to protect his position execute the following transactions choose

between stock or options (100 Google 100 Ford100 IBM100 Bank of America). ATT and

Insider Trading

Execution of Trades Requested:

Description; Discussion &

Expectations

L (PUT Option) To protect the

client’s position in Bank of

America (BAC) I first started to

research about the company. The

Income statement of BAC

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showed poor earnings from prior quarters as well as negative investment returns when

compared to the industry returns and the S&P 500. In addition, BAC stock price has been

declining slowly from $20 to a low of $12.00 per share. As a result of this a put option (at a

strike price of $17.70) would help protect the client from declining prices. A put option is

more valuable as the price o the underlying stock depreciates relative to the strike price.

K (CALL Option) To protect the client’s

position in Ford (F). I researched the

company’s earnings as well as their stock

price and their investment returns. After

seeing a slight increase in their stock price as

well as good reviews from analyst’s

expectations I decided to go with a call

option with a strike price of $11.00. The call

option would allow the client to profit from

the price increases in the stock price.

J (IBM Stock Purchase) To protect the

clients position in IBM. I researched the

company’s earnings as well as their

stock prices and analysts estimates and IBM showed a steady increase in income as well as

stock price. These indicators led me to make a purchase of IBM stock. My expectation is that

the stock price will increase steadily over the next few months.

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I (GOOGLE Stock Purchase) To protect the clients

position in Google. The same research was done

and the increase in the stock price as well as

good earnings in the prior quarters led me to

make a stock purchase of Google. The

expectations are that the price of Google will

continue to increase in the next months, due to

their latest gadgets releases and good reviews I

feel that Google will continue to rise in price

over the next months.

Results

L (Put Option) The put option for BAC

resulted to be in the money as of

November 26th. The put option has a

profit of $145.00. This is due to the

decline in BAC stock price and other

events that are causing a negative

effect on BACs’ earnings (see

November trades for additional

information)

K (Call Option) The call option for Ford resulted to be in the money as of November 26th

. The

call option resulted in a profit of $205.00. The current stock price of Ford is $16.06 this

increase in price resulted in what was expected originally. (See November trades for

additional information)

J (IBM) The current stock price of IBM is $142.89 (See November trades for additional

information). This resulted in a increase of $406.00

I (GOOGLE) The current stock price of Google is $508.12 (See November trades for additional

information). This resulted in an increase of $4,599.00

Observations

M&N The transactions made for ATT were done three days later from the stock and options

trades. They were eventually cancelled a few minutes later. I initially did not make a

purchase of any kind for ATT because this would have been considered insider trading.

However after getting to class I realized that everyone was talking about a purchase of ATT

and I went along with what everyone did and purchased ATT. I am glad to know that I did

not do this in real life because this would have bad consequences to the individual and the

firm.

After looking back at the request posted I realized that instead of doing a stock purchase for

IBM and Google instead I should have done an option trade for both, because I put the client

at risk if the stock price went down significantly. Now, I felt more comfortable and I have a

better understanding of what to expect and how to use the options to protect the client’s

portfolio.

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N O V E M B E R

Trades Requested by Client

Using Ford stock (or any other stock in the portfolio of Prof. Finance) establish a long

straddle. Using Google stock (any other stock in the portfolio of Prof. Finance) establishes a

Short Strangle. Using IBM stock (any other stock in the portfolio of Prof. Finance) establish a

Call Bull spread. Using Bank of America stock (any other stock in the portfolio of Prof.

Finance) establish a Put Bear spread

Execution of Trades Requested Bank of America:

Description; Discussion & Expectations

Similar research of the income statement stock price and other

estimates for Bank of America was done. The stock price of

bank of America continued to decline. Another measure that I

was able to obtain through The Chicago Board of Exchange

was the historical stock volatility. This web site provided a

spreadsheet of the volatility for each month for all stock traded

in the USA.

http://www.cboe.com/data/historicalvolatility.aspx) .

Volatility can be a very important factor in deciding what kind

of options to buy or sell. Volatility helps to show to investors a range that a stock’s price has

fluctuated in a certain period. There are two types of Volatility: Statistical Volatility and

Implied Volatility. Statistical Volatility - a

measure of actual asset price changes over

a specific period of time. Implied

Volatility - a measure of how much the

"market place" expects asset price to move,

for an option price. That is, the volatility

that the market itself is implying

(investopedia.com). However I was not able

to perform this research but I was able to

find the Historical Stock Volatility to help

me have a better understanding of what

strategy to use. A Put Bear Spread was

used for Bank of America because the

price decrease of Bank of Americas stock

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will not be dramatically drastic. A put bear spread is often employs by investors when the

bear put spread in moderately

bearish market environments,

and wants to capitalize on a

modest decrease in price of

the underlying stock. (see

below for graph and premium

used)

Results

The put bear spread resulted

in a total profit of $960,000.

The current stock price is

$11.12 as of November 26th

.

Observations

The bear put spread involves

the purchase of a put option on a particular underlying stock, while simultaneously writing a

put option on the same underlying stock with the same expiration month, but with a lower

strike price. It was hard to get the right put bear spread in place because I did not understand

the trading system that well and I didn’t realize that one of the put trades did not go through

until a few days later. I feel that if I had played more attention I would have had a better turn

out in the result.

Execution of Trades Requested Ford:

Description; Discussion & Expectations

Similar research of the income statement stock price, volatility

and other estimates for Ford was done. The strategy used for Ford

was a Short Strangle. A short strangle involve the simultaneous

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selling of a slightly out-of-the-money put and a slightly out-of-the-money call of the same

underlying stock and expiration date. I used this position because I feel that ford will have

little volatility in the months to come.

Results

The Short Strangle resulted in a loss of

$480,000.

Observations

The Short Strangle resulted in a loss

because it was not successfully traded. The

short strangle turned out to be more like a

short straddle In November 2nd

the stock

price for ford was 14.43 in order to complete the short strangle a put and a call must be sold

and they must be slightly out of the money. However due to many changes in the dates there

was a confusion and instead of completing a short strangle successfully it was difficult to

obtain the same result because of the different dates.

Execution of Trades Requested IBM:

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Description; Discussion & Expectations

Similar research of the income statement stock price, volatility and

other estimates for IBM was done. The strategy used for IBM was a

call bull spread. A call bull spread involves buying an at-the-money

call option while simultaneously writing a higher striking out-of-

the-money call option of the same underlying security and the same

expiration month. Looking at the growth of IBM the trend is more

likely to continue to growth over the next month, therefore a call

bull spread seemed the ideal strategy.

Results

The call bull spread resulted in a

loss of $6,600.

Observations

The call bull spread resulted in a

loss because once again the

trades were not executed

successfully. My initial idea was

to use up all the available funds

to get higher profits. However

the system did not take in that

high amount and the transactions

kept being either cancelled or

they would not go through. I feel

that if I wasn’t greedy I would

have been able to do better in the call bull spread strategy.

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Execution of Trades Requested Google:

Description; Discussion & Expectations

Similar research of the

income statement stock

price, volatility and

other estimates for

Google was done. The

strategy used for

Google was a long

straddle this involve the simultaneously

buying of a put and a call of the same

underlying stock, striking price and

expiration date.

Results

The resulted was a loss of

$99,600.

Observations

The long straddle resulted in due

to low volatility during the month

of November I was expecting the

stock price of Google to move

dramatically however this did not

end up happening and resulted in

a loss. After completing the

transactions for all the request for

the client I now have a better

understanding of how to use

options. I do admit that they are

hard to understand but they are a

great way for individuals and

firms to protect their investments.

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O V E R A L L R E S U L T S F O R T R A D E S

MMM

A

BAC

CORN

EUR

Virtu

al Tr

ad

ing A

ssig

nm

ent

| F

all

20

10

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FORD

GOOGLE

IBM

Virtu

al Tr

ad

ing A

ssig

nm

ent

| F

all

20

10