**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.

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.

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.