Trading Case IN2

Case Objective

To understand the relationship among private information, spot stock index prices and forward stock index prices. 

Case description

This case is identical to IN1 except that traders will receive private “analyst forecasts.”   In this trading case you can trade in two stock index spot markets and one stock index forward market.  In each market you can i.  submit limit orders to buy/sell quantities up to 10000 units at a time, (i.e., make market) and ii. submit market orders to buy or sell some quantity (i.e., take market) up to what is currently available at the best bid or ask.  The former requires submitting bids and asks to buy and sell, whereas the latter requires that you sell to a prevailing bid or buy from a prevailing ask.  Short sales, and borrowing (lending) in the money market are all permitted.  Trading takes place for the first day of the calendar year only.  Any net surplus (deficit) of cash you end the first trading day with accrues (pays) interest at the rate of 5% for the remaining year (i.e., compounded annually).  Settlement in the forward market is at the end of calendar year.  At this time your positions in the two index markets are also marked to the realized end of year index value.  That is, all positions are converted to cash at the end of the calendar year and your trading bonus is determined.  


The set of possible realizations for the end of year realizations for each stock index are: {7900, 12100}.  Each realization is equally likely and the realization for index B is independent of the realization for index A.  During a trading session multiple independent trials are conducted. 

Trading Objective

Your aim is to make as much money as you can and your trading bonus = 0.0001*total end of year market cash.  Your trading bonus is cumulated across trials.

Private Information

You will receive, for each index, forecasts of the end of year realized index value throughout the trading day.  The information is in the form of the “true value” plus or minus some error.  The expected value of the error is zero but the realized error can be positive or negative.  Different trader types get different unbiased forecasts so that in aggregate the market as a whole always has better information than any individual forecast.  In addition, information is such that you receive forecasts with smaller errors as the period progresses.

In the information text box (a single click on each index security reveals the information in the information text box) you may observe the following screen example:

Forecast Time: 0 Index A forecast = 11076.705

This means that the forecast became available immediately (0 -seconds after the start of the market) and reveals that an unbiased estimate of the end of year index A value equals 11076.705 for this particular trader.  Other traders will have different unbiased forecasts.

Forecast Error = (x – 0.5)*y(time), where x is a random number between (0,1) and y(time) is a scaling variable that starts at 5000 for the first message and reduces as 4500, 4000, 3500, 3000, 2500, 2000, 1500, 1000, 500 for 10 updates over time.  So the first error is quite large and equals:  realized value +/-  2500 shrinking down to +/- 250.

The same type of information structure is available for Index B.