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Entire Unit Module.doc.doc Document Transcript

  • 1. The Iowa Electronic Markets The Role of Markets in Business Decisions Curriculum using the IEM Prepared for Introduction to Business Courses By Sal Veas Charley Lee Morrow Santa Monica College Delaware State University
  • 2. The Role of Markets in Business Decisions Teaching Objectives The purpose of this module is to introduce the ideas of markets and their influence on business decisions to the Introduction to Business class. These topics will help students better understand all aspects of business including marketing, business formation, economics, finance, and global issues. The ultimate aim is to expose students to the Iowa Electronic Market (IEM), which will serve to reinforce other lessons throughout the course. Overall Learning Objectives Students should be able to: 1. Understand what a market is and who the players are 2. Understand the different characteristics of markets 3. Identify key markets that affect businesses 4. Use markets to get information about current and future events IEM Learning Objectives Students should be able to: 1. Review current market prices and explain what they mean. 2. Review data and determine if there are to be changes in market prices. 3. If changes in market prices are anticipated, explain why they may occur based on an understanding of business principles. Important Aspects of the Assignments • Students apply lessons from the lecture to real-world situations. • Students start with specific directed tasks that slowly force students to expand and generalize their knowledge. • Students build on previous knowledge and experience. Module Contents 1. Lecture Outline 2. Power Point Slides and lecture notes 3. Introduction to the IEM assignment (includes basic description of the IEM) 4. Introduction to the IEM power point slides and lecture notes 5. Assignments
  • 3. Lecture Outline The Role of Markets in Business Decisions 1. Definition of a market 2. What do they exchange 3. Combinations of exchanges: goods, services, promises, money 4. Roles in a market: buyer, seller, rule maker 5. Types of Markets 6. Importance of markets to business people 7. Iowa Electronic Market (IEM) • MSFT (Microsoft) Price Level Market • Computer Industry Return Market • Federal Reserve Monetary Policy Market 8. Modules Lecture Summary 1. WHAT IS A MARKET Two or more individuals, groups, or both, who come together to make exchanges. They are often referred to as a Buyer and Seller. 2. WHAT DO THEY EXCHANGE? Resources with differing levels of scarcity • Physical goods, such as, Soap and Cars • Services, such as, Haircuts and Checking Accounts • Money 3. DIFFERENT COMBINATIONS OF EXCHANGES: A. Goods for Goods • Bartering, such as, a farmer who trades fruit grown on their farm for wine produced by another farmer. • Countertrade, such as, Ford Tractors traded for commodities, such as, wheat, hemp, or other industrial products B. Goods for money, Money for goods • Purchasing household products from Walmart. • Selling your car in the classified advertisements C. Services for money, Money for services • Purchasing phone service from MCI • Repairing a neighbors car for money D. Promises for money; Money for Promises
  • 4. • Paying money for car insurance in exchange for a promise by the seller to compensate you for loss or damages to your car • Receiving money from a lender (Student loans), in exchange for a promise to pay back the loan plus Interest, some time in the future E. Money for money • Exchanging currency in foreign markets 4. WHAT ROLES CAN PARTICIPANTS PLAY IN THE EXCHANGE? A. Buyer or Seller B. Price setter or Price taker • When purchasing gasoline, the buyer is a price taker and the gas company is a price setter. C. Rule Maker • SEC in the securities market 5. TYPES OF MARKETS A. Legal and Illegal • Purchasing a prescription drug from your local pharmacy • Purchasing cocaine from a drug dealer B. Real and Virtual Markets • Purchasing your textbook at your college bookstore • Purchasing your textbook at Amazon.com C. 24/7 and Time Limited Markets • Purchasing your textbook at Amazon.com at anytime of day and any day of the week. • Auctions, such as, eBay, where the timeframe to participate or complete the transaction is limited and expires 6. IMPORTANT MARKETS • Labor • Capital • Ideas • Political • Information • Land • Currency • Financial • Stocks and bonds • Commodities • Futures • IEM 7. WHAT IS THE IOWA ELECTRONIC MARKET (IEM) • Go to Introduction Module
  • 5. • Federal Reserve Monetary Policy Market • Computer Industry Returns Market • MSFT (Microsoft) Price Level Market 8. BUSINESS FUNCTION SPECIFIC MODULES • Economics • Forms of Business Ownership • Global Business • Marketing • Money and Banking • Finance • Securities • Personal Finance
  • 6. Introduction to Business Module Assignment Introduction to the IEM and the Business Market In order for business managers to make appropriate strategic business decisions it is critical that they understand the competitive market environment of the business. These instructions are designed to provide students with an overview of the various markets and conditions under which they must develop competitive decision making strategies. Following the discussion of the market, students will be introduced to how the IEM is applied as a basic tool for understanding and using instruments to measure and assess selected markets. The Iowa Electronic Market (IEM for short) is a computerized market in which financial contracts can be traded (bought or sold). For these assignments, we will be using a series of contracts based on Apple Computer (AAPL), IBM (IBM), Microsoft (MSFT), the S&P500 index, and the Federal Funds Rate. Shares of these firms trade over the counter (NASDAQ) and on the New York Stock Exchange (NYSE). A daily index value is determined for the S&P500 based upon the stock prices of the 500 companies that comprise the index, and the Federal Funds Rate is determined by the Federal Reserve during its Open Market Committee meetings. These contracts are listed on the IEM under the market labels Computer Industry Returns Market (“Comp_Ret”), Microsoft Price Level Market (“MSFT_Price”), and the Federal Reserve Monetary Policy Market (“FedPolicyB”). These contracts are described briefly later in this note and in more depth in the IEM Trader’s Manual. Detailed descriptions of these markets are available at the IEM website: http://www.biz.uiowa.edu/iem/markets/computer.html http://www.biz.uiowa.edu/iem/markets/msft.html http://www.biz.uiowa.edu/iem/markets/FedPolicyB.html Objectives The objectives of the IEM assignments are to help you apply class concepts in a "real world," unstructured way to learn how to: 1. Understand the dynamics of the business markets and their impact on managerial decision making. 2. Use the Federal Reserve Monetary Policy Market as a basis for understanding the influences of Fed Policies on interest rates and economic activities of businesses. 3. Apply the Computer Industry Returns Market, and MSFT (Microsoft) Price Level Market modules to determine the growth and decline of the publicly traded stocks of these businesses. 4. Apply the concepts of IEM in business financial market decisions.
  • 7. What is the Iowa Electronic Market The Iowa Electronic Market (IEM for short) is an on-line, computerized futures market where financial contracts can be traded (bought or sold) with payoffs based on real-world events such as political outcomes, stock price returns, box office receipts of motion pictures, etc. For this assignment students will be using the Federal Reserve Monetary Policy Market, the Computer Industry Returns Market, and MSFT (Microsoft) Priced Level Market modules. Opening an IEM Account All students need to open an account with the Iowa Electronic Market. This involves a minimum deposit of twenty dollars. Funds remaining in your account are refundable at the end of the semester. You can open an IEM account over the Internet. To do so, go to the sign-up webpage: http://iemweb.biz.uiowa.edu/signup/ and follow the instructions given to you by your instructor. (DO NOT use forms other than those given to you by your instructor. Using other forms may result in fees or decreased deposits in your account.) After filling out your signup forms, you may need to deposit cash with the IEM office (W283 PBAB, phone 335-0881). Your instructor will give you details about any deposits you need to make. Accessing the IEM You can access the IEM through its website address: http://www.biz.uiowa.edu/iem/ You access your trading account from the market pages or directly at: http://iemweb.biz.uiowa.edu/ General information about the IEM can be found in the Trader’s Manual. This is a great resource, which includes a PowerPoint presentation about the IEM: http://www.biz.uiowa.edu/iem/trmanual/ Specific information on how to navigate the IEM can be found in the WebExchange Users’ Guide: http://iemweb.biz.uiowa.edu/webexmanual/
  • 8. Contracts Computer Industry Contracts The Computer Industry Contracts consist of two series of contracts. Every month, existing contracts in each series are liquidated and payments are made as described below. Then, new contracts are created for each series. These events occur on the Monday after the exchange-traded options for the underlying stocks expire (the Monday after the third Friday of each month). MSFT (Microsoft) Price Level Market: The liquidation values for the contracts in this market are determined solely by closing prices of Microsoft Common Stock (MSFT) on NASDAQ (the National Association of Security Dealers Automated Quotation system). Thus, to do well in this market, you will need to understand what determines real stock market prices. Contracts and Liquidation Rule: Each month, an initial pair of contracts consists of "MSxxxmH" and "MSxxxmL" where “m” corresponds to the month as given below and “xxx” corresponds to a price of $xxx. The payoff for the "H" contract will equal $1.00 if the Wall Street Journal closing price for Microsoft Common Stock on the third Friday of month “m” exceeds $xxx. It will equal $0.00 otherwise. The payoff for the "L" contract will equal $1.00 if the Wall Street Journal closing price for Microsoft Common Stock on the third Friday of month “m” is less than or equal to $xxx. It will equal $0.00 otherwise. Thus, the contracts traded in this market for liquidation in month “m” are:
  • 9. Code Contract Description Liquidation Value
  • 10. MSxxxmH “Higher” contract $1.00 3rd Friday closing > $xxx MSxxxmL “Lower” contract $1.00 3rd Friday closing <= $xxx
  • 11. In these contract codes, “m” refers to the month of expiration as given by the following table:
  • 12. Month Designation Month Designation Month Designation
  • 13. January a May e September I February b June f October j March c July g November k April d August h December l
  • 14. For example, consider the Microsoft contracts for the November 1998 trading month. They were MS105kH and MS105kL. The first contract would pay a dollar if the closing price of Microsoft on the third Friday of November (11/20/98) were greater than $105. The second contract would pay one dollar if the closing price of Microsoft on 11/20/98 were less than or equal to $105. On November 20, Microsoft closed at $113.625. The table below shows the liquidation values of the two contracts traded on the IEM.
  • 15. Symbol Liquidation
  • 16. MS105kH $1 MS105kL $0
  • 17. Computer Industry Returns Market: The liquidation values for the contracts in this market are determined solely by the rates of return of Apple Computer Common Stock (AAPL), IBM Common Stock (IBM), Microsoft Common Stock (MSFT) and the S&P500 index (SP500). Whichever of these has the highest rate of return as specified below will payoff $1.00 per share. The remaining contracts will payoff zero. Thus, by predicting which company will do well in the stock market will help you predict what contracts will do well in the IEM. Contracts: Contracts will be designated by a “ticker symbol” (this is an abbreviation used by the stock market to designate a company) and a letter denoting the month of contract liquidation. Thus, the contracts traded in this market for liquidation in month “m” are:
  • 18. Code Contract Description Liquidation Value
  • 19. AAPLm Apple Computer $1.00 if AAPL NASDAQ Return Highest IBMm IBM $1.00 if IBM NYSE Return Highest MSFTm Microsoft $1.00 if MSFT NASDAQ Return Highest SP500m S&P 500 Market Index $1.00 if SP500 NYSE Return Highest
  • 20. In these contract codes, “m” refers to the month of expiration as given in the Microsoft Price Level description above. Liquidation Rule: For AAPLm, IBMm and MSFTm, liquidation values are determined by the dividend- adjusted rate of return for the associated stock. The dividend adjusted rate of return computed from closing stock prices of the underlying listed firm between the third Friday in the liquidation month and the third Friday in the previous month. For these purposes, closing prices as reported in the Midwest edition of the Wall Street Journal are used. In particular, this return is calculated as follows. First, the raw return on the underlying stock is computed (as the closing price on the third Friday of the liquidation month, minus the closing price from the third Friday of the previous month, plus any dividends on ex-dividend dates). Then, we divide the raw return by the closing stock price from the previous month to arrive at the dividend-adjusted rate of return. Since the S&P500 index does not pay a dividend, the return is computed as the capital gains rate of return for the SP500 contract. To do this, subtract the closing index value on the third Friday of the previous month from the closing index value on the third Friday of the liquidation month. Then, divide by the previous month’s closing index value. The contract associated with the stock (or index) that has the highest return will pay $1. All other contracts will pay $0. For example, consider the returns for the November 1998 trading month. The following table shows the stock prices on the third Friday in October and in November along with dividends paid. Symbol Price10/16/98 Price11/20/98 Dividends Paid Returns Liquidation AAPL 36.6875 35.3125 0.00 -3.748% $0 IBM 135.9375 160.125 0.22 17.955% $1 MSFT 105.0625 113.625 0.00 8.150% $0 SP500 1056.42 1163.55 -- 10.141% $0 The returns are calculated as follows: RAAPL = (35.3125-36.6875)/ 35.3125 = -3.748% (Indeed, returns can be negative!) RIBM = (160.125+0.22–135.9375)/135.9375 = 17.955% (IBM paid a dividend of 0.22.) RMSFT = (113.625-105.0625)/105.625 = 8.1505% RSP500 = (1163.55-1056.42)/1056.42 = 10.141% Price and dividend information can be found in the Wall Street Journal, on the IEM itself and through various online sources. The Federal Reserve Monetary Policy Market The Federal Reserve Monetary Policy Contracts consist of three contracts. After every FOMC meeting, existing contracts in the series are liquidated and payments are made as described below. Then, new contracts are created as described below. The schedule of FOMC meetings can be found at the Federal Reserve System's web site: http://www.bog.frb.fed.us/fomc/.
  • 21. The Directors of the IEM reserve the right to introduce new contracts to the market as spin-offs of existing contracts. When a contract spin-off occurs, an original contract will be replaced by new contracts. This divides the payoff range of the original contract into sub-intervals. No holder of the pre-spin-off contracts will be adversely affected. Traders will receive the same number of each of the new contracts as they held in the original. The sum of the liquidation values of the new contracts will equal the liquidation value that would be paid to the original in the absence of a spin-off. Decisions to spin-off a contract will be announced at least two days in advance of the spin-off. The new contract names, the specifications regarding liquidation values and the timing of the spin-off will be included in the announcement. This announcement will appear as a News Bulletin on the WebEx login screen. Liquidation values will be set according to the contract descriptions. For example, if, at the close of the regularly scheduled FOMC meeting in month MMYY, the FOMC announces a decision to raise the target for the federal-funds rate, then each FRupMMYY contract held by a trader will be redeemed for $1.00, while the FRsameMMYY and FRdownMMYY contracts will expire with a $0.00 redemption value. Note that liquidation values will depend solely on decisions made at the specific regularly scheduled FOMC meeting to change or not change the federal-funds rate target from its level as of the start of that same meeting. Neither changes in the federal-funds rate target made during the inter-meeting period nor decisions regarding other monetary policy issues or instruments will have any direct bearing on those liquidation values. Contracts will be designated by a symbol and letter denoting up, down, or the same and the month and year of contract liquidation. Thus, the contracts traded in this market for liquidation in month “MM” and year “YY” are: Code Contract Description / Liquidation Value FRupMMYY $1.00 if the fed-funds rate target rises; $0 otherwise FRsameMMYY $1.00 if the fed-funds rate target remains unchanged; $0 otherwise FRdownMMYY $1.00 if the fed-funds rate target falls; $0 otherwise The practice of the FOMC, initiated at the May 18, 1999 meeting, has been to release a public announcement shortly after each regular meeting describing the funds rate target decision. (See http://www.bog.frb.fed.us/boarddocs/press/General/1999/.) So long as that practice continues, this public announcement will be the official source of FOMC policy decisions for purposes of determining liquidation values. If no such statement is released by the FOMC, the Wall Street Journal will become the official source. Specifically, the most definitive statement of FOMC actions appearing in the three consecutive issues of the WSJ (Central Edition) after the close of the FOMC meeting will be taken as the policy decision. If the decision of the FOMC remains unclear even after three consecutive WSJ issues, the outcome "fed-funds rate target remains unchanged" will be declared the result for purposes of determining liquidation values. The judgment of the IEM Board of Governors will be final in resolving questions regarding the nature of the FOMC decision, including questions arising from typographical or clerical errors. Trading in a set of contracts will continue for as much as two days beyond the end of the meeting on which those contracts are based. If an official announcement of the FOMC decision is made at the end of the meeting or within two days thereafter, the market will close and contracts will be liquidated as soon as is possible after the appearance of that announcement. If no official announcement has been made by 5:00 PM CST on the second business day after the end of the meeting, the market will close to further trading at that time. The following business day a decision regarding liquidation values will be made by the Board of Governors of the IEM based on reports appearing in the WSJ, with liquidations occurring shortly thereafter. Trading on the IEM You can trade on the IEM in several ways. First, you can buy or sell unit portfolios. A unit portfolio is a set of contracts such as AAPLm, IBMm, MSFTm and SP500m. You can always buy or sell such portfolios for $1.00 each. Thus, when you start to trade and do not own any contracts, you can buy a unit
  • 22. portfolio and then start to trade. (To do this, select the appropriate contract under “Buy Bundles” or “Sell Bundles” in the “Market Order” drop down menu. Enter a quantity and press the “Market Order” button.) Second, you can buy or sell using a "market order." On the market screen, you will see that some individuals have posted an order to buy or to sell a contract (e.g., MSFTi, the contract for September liquidation in the Computer Industry Returns Market) at a specific price. If you believe that a posted order represents a good deal, you can buy or sell at the posted price. (To do this, select the appropriate contract under “Buy at Best Ask” or “Sell at Best Bid” in the “Market Order” drop down menu. Enter a quantity and press the “Market Order” button.) Third, you can buy or sell using a "limit order." To do so, you state the price at which you are willing to buy or sell a contract and post a limit order on the screen. In doing so, you are waiting for someone who is willing to buy or sell at your stated price. In this manner, when your order executes, it will execute at your stated price, not at somebody else’s. The negative is that the order may never execute because nobody likes your price because it is too high or low. (To place a limit order, select the appropriate contract under “Post a Bid” or “Post an Ask” in the “Limit Order” drop down menu. Enter a price, quantity and expiration date and press the “Limit Order” button.) Completing Your Assignments and Submitting Them As you can see below, the IEM assignments are extensive, multi-part assignments that draw together many concepts from the class. It would be wise to work on the various parts of the assignments as we go over the relevant topics in class. To prepare the assignments for submission, please use the following guidelines: 1. Each assignment must be typed. Label clearly each assignment with a cover page giving your name, student number, and section number. 2. Complete each part in a separate section clearly labeling them, Part 1, Part 2, etc. 3. Within each section, give the requested information, including sources of information gathered and equations used to calculate results. 4. If appropriate, include print screens and page prints of IEM orders to document your activity. 5. Turn in your completed assignment to your instructor on the date it is due.
  • 23. ASSIGNMENTS Now you will find a series of assignments, which can be used in an Introduction to Business course. A typical description and objectives for this course might include the following: Course Description: This course provides students with an overview of business in an increasingly global society. Students will complete the course with knowledge of the general business environment, economic systems, business ethics, and technology and information systems. In addition, students will learn the fundamentals of economics, business ownership, entrepreneurship, finance, management, and marketing. Key themes woven throughout the course include exploration of career options, and development of business problem-solving skills. Course Objectives: Upon successful completion of this course the student will be able to: • Describe the functional areas of business. • Explain influences on the business environment. • Identify distinguishing characteristics of business formation. • Examine the key functions of management. • Describe the role of product, price, place, and promotion in marketing. • Recognize the key areas of money, finance, and investments. • Demonstrate business problem-solving skills. With the above objectives in mind, the assignments integrate the IEM with functional areas of business. Building on the concept of Markets as described earlier, students are asked to apply concepts in the course in their use of the IEM.
  • 24. No. 1: INTRODUCTION TO IEM ASSIGNMENT DUE: ___________ GOAL 1. familiarize students with a trading environment where financial contracts can be bought or sold, 2. familiarize students with the jargon used in financial markets. 3. familiarize students with trading in the IEM. Assignment 1. Visit and read the following two websites: General information about the IEM can be found in the Trader's Manual. This is a great resource, which includes a PowerPoint presentation about the IEM: http://www.biz.uiowa.edu/iem/trmanual/ Specific information on how to navigate the IEM can be found in the WebExchange Users' Guide. This website will help you answer the questions below: http://iemweb.biz.uiowa.edu/webexmanual/ 2. Look up and record the current bid and ask for MSFTm1 on the Computer Industry Returns Market. What does this bid mean? What does this ask mean? 3. When you buy one unit portfolio bundle in the Microsoft Price Level Market of the IEM, which contracts do you receive as part of this bundle and how many of each contract do you receive? What does a bundle cost? 4. Using the IEM, how would you: a. Submit a market order to buy SP500m? b. Submit a market order to sell MSxxxmH2? c. Submit a limit order to buy MSxxxmL for $0.646? d. Submit a limit order to sell FRsameMMYY3? 1 The letter “m” designates the contract month with “a” representing January, “b” representing February, etc. 2 Here, “xxx” designates a cutoff price level for Microsoft stock. 3 Here, “MMYY” designates the contract month and year.
  • 25. No. 2: BUSINESS FORMATION DUE: ___________ GOAL Demonstrate knowledge of U.S. business formation. In particular, apply corporate formation concepts to companies used in the IEM. Pre-requisites Before students attempt this assignment, the instructor should have discussed corporate formation, including corporations, stockholders, and board of directors. Assignment (Part 1) Choose one company from IBM, Apple Computer, or Microsoft and answer the following 1. Identify Board of Directors, Chairman of the Board, and Chief Executive Officer. 2. Identify the Board of Directors, which are from inside the corporation and those who are outside directors? (Part 2) 1. Go to the Microsoft website and find the number of outstanding common shares of stock. 2. Go to a website, such as, www.Nasdaq.com, and get current price quotes. Use information to determine current market value of Microsoft. 3. Read the prospectus of the IEM Microsoft price market. Look at the current contract prices. Using the contract prices as probabilities, ascertain the market’s estimate of the likelihood of Microsoft’s overall market value being greater on the third Friday of the month than it is today.
  • 26. No. 3: GLOBAL CONTEXT OF BUSINESS DUE: ___________ GOAL Describe how currency exchange rate fluctuations impact business. Pre-requisites Before students attempt this assignment, the instructor should have discussed exchange rates, and risks associated with exchange rate fluctuations. Assignment Sales Information 2000 IBM Total Sales 88400 Asia Pacific Sales 17700 Americas 38600 Europe/Middle East/Africa 24300 OEM 7800 Microsof 2000 t Total Sales 22960 Asia 2600 South Pacific & Americas 8330 Europe, Middle East, and Africa 5020 OEM 7010 2000 Apple Total Sales 7,983 Japan 1345 Asia Pacific 355 Americas 4298 Europe 1817 Other 168
  • 27. 1. If the above information is not current, go to the Apple, IBM, and Microsoft Web sites and update the sales figures above. 2. Go to a Web site which provides current and historical data on exchanges rates, (e.g. www.oanda.com). Look at the exchange rate between the U.S. dollar and three other major currencies. Select three currencies, which you believe can have the greatest impact on sales and/or profitability of Apple, IBM, and Microsoft. Identify any trends over the past 8 weeks. The currencies you select do not have to be identical for each company. Your selections should reflect the sales configurations of each company. Provide a brief narrative supporting your selections. 3. Which of these three companies would be most helped or hurt by the recent changes in the exchange rates? 4. How might this affect their stock prices? 5. Go to the IEM and examine the historical closing prices for their respective contracts in the Computer Returns Market on the 3rd Friday of the relevant months during the same time period. Submit your findings. 6. Are the prices for the different contracts consistent with your expectations? Why or why not?
  • 28. No. 4: ECONOMICS DUE: ___________ GOAL Understand the relationship between the Federal Reserve monetary policy and Interest Rates. To reinforce student understanding of the role of the Federal Reserve FOMC in influencing interest rates. Pre-requisites Before students attempt this assignment, the instructor should have discussed interest rates, the Federal Reserve (the Fed), and the role that decisions by the Federal Reserve (specifically the FOMC) have on interest rates. Assignment 1. Search for external predictions of changes in FOMC policy on the Internet (e.g. news articles). Describe and support your conclusions documenting what you found in your Internet search. 2. Go to the IEM FedPolicy B market and examine the historical closing prices when the contracts were liquidated for the relevant months during the same time period of your Internet search. 3. Are the prices for the different contracts consistent with your expectations? Why or why not? 4. What do recent actions of the FOMC suggest are the expectations by the Fed of future economic activity? 29
  • 29. No. 5: MARKETING DUE: ___________ GOAL Understand the impact Federal Reserve policy may have on the marketing function. Pre-requisites Before students attempt this assignment, the instructor should have described the general marketing functions. In addition, interest rates and the Federal Reserve policy should have been discussed. Assignment 1. Go to the Fed Policy Market and look at the current contract prices. 2. What is the market’s estimate of the likelihood that Fed policy will raise interest rates at their next meeting? 3. What is the market’s estimate of the likelihood that they will lower interest rates? 4. If the Fed increases interest rates, what would be the effect on: a. sales of real estate and prices of real estate b. the ability of people to buy things on their credit cards. 5. Assume you are a marketer of a Luxury car. Given the situation of increasing interest rates, how might you change the market positioning of this car. Give an example. 30
  • 30. No. 6: SECURITIES DUE: ___________ GOAL To familiarize students with a trading environment where financial contracts can be bought or sold, familiarize students with the jargon used in financial markets, familiarize students with financial news and information sources, and reinforce concepts that we learn in the classroom such as market efficiency, return calculations, and stock valuation. Assignment For this assignment, you will be required to keep a log in which you analyze trading in the Iowa Electronic Market (IEM). You are asked to follow the Computer Returns and Microsoft Price Level markets during the time period to . During this period, you will keep a log in which you identify and record events that you think might have an effect on trading in the chosen contract. You will also be asked to think about your own trading and asked to complete some specific tasks as discussed below. News about the size and riskiness of a firm's profitability and the general economy can affect a firm's stock price. For this part of the assignment, you are required to build a price and news log for the companies trading in the Computer Industry Returns and MSFT (Microsoft) Price Level Markets to see how news can affect stock prices and contract prices in the IEM. 1. Build a price and news log for the companies trading in the Computer Industry Market along with the S&P500 during the period you are asked to follow the market (above). Record the following information once a week on the same day each week: a. Closing prices for each underlying security. (IBM stock prices can be found in the NYSE Composite Index each day; Microsoft and Apple stock prices can be found in the NASDAQ Index each day and the S&P500 Index is listed in the Wall Street Journal, upper left corner of page C1 each day.) b. IEM last trade prices for each IEM traded contract. (These prices can be found under the "market information" button on the IEM.) 2. For each company (AAPL, IBM and MSFT), find one news article from any source that you believe should affect stock prices for that company during this period. (Articles can apply to more than one company, but you are required to find a minimum of three articles total and at least one that applies to each company.) 3. For each news article, please answer the following questions: a. Explain how you believe the information will affect prices for the company's stock and prices for the company's contract on the IEM (i.e., the one that pays $1 if that company has the highest return). 31
  • 31. b. Did the event change the amount you think investors would be willing to pay for the company's actual stock now? How about in the future? c. Did the event change the amount you would be willing to pay for the company's IEM contract? Given that this represents your personal demand for the IEM contract, has your personal demand for the IEM contract increased or decreased? What do you think has happened to the overall demand? d. Finally, for each news article, look up (in your log) both stock exchange and IEM prices for the company affected. Compare your predictions to the actual price changes. Did prices move in the direction you expected? Can you reconcile your predictions about demand and price changes with what actually happened to prices in the stock market and the IEM? 32
  • 32. No. 6: SECURITIES (Advanced) DUE: ___________ GOAL To familiarize students with a trading environment where financial contracts can be bought or sold, familiarize students with the jargon used in financial markets, familiarize students with financial news and information sources, and reinforce concepts that we learn in the classroom such as market efficiency, return calculations, and stock valuation. Assignment For this assignment, you will be required to keep a log in which you analyze trading in the Iowa Electronic Market (IEM). You are asked to follow the Computer Returns and Microsoft Price Level markets during the time period to . During this period, you will keep a log in which you identify and record events that you think might have an effect on trading in the chosen contract. You will also be asked to think about your own trading and asked to complete some specific tasks as discussed below. News about the size and riskiness of a firm's profitability and the general economy can affect a firm's stock price. For this part of the assignment, you are required to build a price and news log for the companies trading in the Computer Industry Returns and MSFT (Microsoft) Price Level Markets to see how news can affect stock prices and contract prices in the IEM. 1. Build a price and news log for the companies trading in the Computer Industry Market along with the S&P500 during the period you are asked to follow the market (above). Record the following information once a week on the same day each week: a. Closing prices for each underlying security. (IBM stock prices can be found in the NYSE Composite Index each day; Microsoft and Apple stock prices can be found in the NASDAQ Index each day and the S&P500 Index is listed in the Wall Street Journal, upper left corner of page C1 each day.) b. IEM last trade prices for each IEM traded contract. (These prices can be found under the "market information" button on the IEM.) c. The rate of return earned to date on each of the three securities and on the index. 2. For each company (AAPL, IBM and MSFT), find one news article from any source that you believe should affect stock prices for that company during this period. (Articles can apply to more than one company, but you are required to find a minimum of three articles total and at least one that applies to each company.) 3. For each news article, please answer the following questions: 33
  • 33. a. Explain how you believe the information will affect prices for the company's stock and prices for the company's contract on the IEM (i.e., the one that pays $1 if that company has the highest return). b. Did the event change the amount you think investors would be willing to pay for the company's actual stock now? How about in the future? c. Did the event change the amount you would be willing to pay for the company's IEM contract? Given that this represents your personal demand for the IEM contract, has your personal demand for the IEM contract increased or decreased? What do you think has happened to the overall demand? d. Finally, for each news article, look up (in your log) both stock exchange and IEM prices for the company affected. Compare your predictions to the actual price changes. Did prices move in the direction you expected? Can you reconcile your predictions about demand and price changes with what actually happened to prices in the stock market and the IEM? 4. Determine how the prices of the IEM contracts respond to changes in the rates of return earned to date. Did this change over contract period? Explain. 34
  • 34. No. 7: MONEY AND BANKING DUE: ___________ GOAL Understand the impact Federal Reserve policy may have banking. Pre-requisites Before students attempt this assignment, the instructor should have discussed interest rates, the Federal Reserve (the Fed), and the role that decisions by the Federal Reserve (specifically the FOMC) have on interest rates. Also, general banking issues, including bank products, should be identified. Assignment 1. Go to the FedPolicy B Market and look at the current contract prices. What is the likelihood that Fed policy will raise interest rates at their next meeting? What is the likelihood that they will lower interest rates? 2. If the Fed policy increases interest rates, what would be the effect on: 1) cost of business loans 2) mortgages 3) credit card interest 3. Does the fact that banks are raising the price of their products imply that they are going to make more profit? Explain. 4. How would business people use the information in the Fed Policy Market in deciding whether or not to take out a loan from a bank today? 35