Economics of Futures Markets Term Project

8/3/2019 Economics of Futures Markets Term Project

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Steven LibrettiWillis WigginSimone Thomas

Economics of Futures Markets Term Project`

Part 1December Cocoa Futures

History of Cocoa

It is estimated that there are about 3 billion pounds of chocolate consumed annually byAmericans and even more by the Europeans with sixteen out of twenty top chocolate consumingnations. Historically, more chocolate is consumed in the winter time and since 2006 prices havepractically doubled due to crop shortages as well as an increased consumption rate due to thegrowing popularity of dark chocolate. With this we find companies such as BT Cocoa, BarryCallebaut, Cargill, and a few others buying cocoa in bulk from a few South American countries,Ghana, Indonesia, and a select few other places around the world. After being purchased by

these companies, it is sold to confectioners such as Hershey and Nestle where they package thechocolate. The demand for cocoa derived directly from the demand for chocolate whereas thesupply is subject to the cocoa producing nations. Currently the top five cocoa producing nationsare the Ivory Coast, Indonesia, Ghana, Nigeria, and Cameroon and these five nations account forabout 70% of the annual global cocoa production.

Cocoa Futures

Cocoa is traded on the Intercontinental Exchange (ICE) under the ticker symbol CC. Cocoa istraded using this symbol in dollars per metric ton with a contract size of 10 metric tons. Cocoahas five contract listings or delivery dates with those being: March, May, July, September, andDecember. It is found that there is no daily price limit on Cocoa though the contract is traded

daily on the ICE from 9 am to 7 pm Greenwich Mean Time or 1:30 a.m. - 3:15 p.m. New


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York Time. Cocoa is settled by direct delivery at a licensed warehouse in the Port of NewYork District, Delaware River Port District, Port of Hampton Roads, Port of Albany or Port ofBaltimore. The initial margin for Cocoa is $2,660 while the maintenance margin is $1,900. TheFirst Notice Day for CC is the thirteenth business day of the month preceding contract month andthe Last Trading Day is one business day prior to the last notice day.

Historical Cocoa Futures Pricing Information

Current Cocoa Futures Pricing and Volume


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Technical Analysis

As we look at this chart above we can graphically see the price movements that December 11Cocoa has had this year. We look at the graph and initially we will see that it has an overalldownward slope to it though the grade is not very steep at all. We find that the highest prices

paid for contracts of December 11 Cocoa were paid in the summer months while the pricesbegan to taper off drastically as we are now coming into the winter months. Early in the yearvolume for December Cocoa Futures remains low and does not experience and type of increaseuntil August where the volume spikes. As we look at this chart we see that from January up untilthe middle of June December Cocoa experiences support at the $2,900 price level while facingresistance at around $3,400 though there is a point in late February, early March that thecommodity breaks through this resistance and trades up to $3,600. December Cocoa trades atthis price range for a very short amount time when it then retreats back down to the previouslyestablished level of support. The commodity remains seemingly consistent in the spring monthsas volume increases, though only slightly from previous months. It is not until the summermonths where we see new price actions with December Cocoa.

In the summer up until early fall December Cocoa had support at around the $2,800 price rangewhile facing resistance when try to break through the $3,000 price level. Another interestingnote the volume compared to the price paid in the summer months and then in the fall and wintermonths. The volume goes from note even 5,000 to well over 20,000 in a matter of two months.As you examine the chart and move from the summer months of July and August to the fallmonths where the volume increases drastically you will see how the price begins to steadily dropwith no lower support until late September, early October where we begin to see a support levelestablished around $2,600. December Cocoa appears to face some congestion through Octoberuntil November hits where Cocoa loses all support again. Throughout September and Octoberwe can see that there is support for Cocoa in the $2,600 price range while it faces resistancewhen moving towards $2,800 as it never even breaches this price. It appears that in NovemberCocoa loses its support at around $2,600 and continues to fall off through November andDecember as the demand for this product begins to increase. December 2011 Cocoa is nowtrading at $2,021 in the month of December and it is unclear where support and resistance levelswill be established. By looking at this chart we might be able to come to a conclusion that therewill be support around the $2,000 price range while it will face resistance at about $2,200. Thisremains unclear as we are only in the second week of December and there is little informationavailable to us at this time.

You can look at the lower part of the graph and see the way the volume dramatically changes asthe seasons change. December Cocoa sees what appear to be abnormal spikes in volume inAugust which is not nearly matched until the middle of November. It appears that the volumefor December Cocoa settles as August draws to a close and we continue through September andOctober. Volume begins to increase again towards the end of November as we lead our way intothe holiday months where chocolate consumption is at its highest point. The open interest forDecember Cocoa remains at 51 today while we can see that over the course of the year it hasremained relatively stable at this point. Open interest however plummets right as November hitsand remains


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Fundamental Analysis

We can look at this graph of prices and volume for December Cocoa futures and generate some

insight as to why it is depicted as such. Starting with the volume we can look at this and see that

volume remains relatively stagnant from January through July, though it does increase from

seemingly 0 to what appears to be about 3,000. It is not until we start moving towards the

holiday months which bring the cold weather and the desire for chocolate products, specifically

cocoa. In august there is an inexplicable spike in volume, though there appears to be some

support at this volume until September and October pass through and the volume levels around

40,000 in these months and continues to hold true to this level with slight increases in the month

of November. As the months pass we can how the demand for December Cocoa continues to

change. As we are moving towards the holidays, demand for chocolate begins to increase as we

can see at a startling rate with the volume increasing as it has. As the demand begins to increase

through the holidays, the price begins to fall, particularly at the start of September, where it does

not gain some positive momentum again until the beginning of October. The increasing demandcoupled with increasing supplies drives prices for the commodity and ultimately for consumers

downward. This supply and demand action takes place between September and October and also

November and December.


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Part 2Patriot Coal Corporation (PCX) Stock Report

Patriot Coal Company is a market leader of metallurgic and thermal coal in the eastern UnitedStates. The Patriot Coal Company was founded in 2007 after being spun off from the Peabody

Energy Company. As defined by the Securities and Exchange Commission, a spinoff is definedas," when a parent company distributes shares of a subsidiary to the parent company'sshareholders (SEC). This spin off was completed because Peabody Energy, being the leadingprivate sector coal company in the United States, had to focus on its core business; and feltPatriot Coal would do well as being its own entity. Patriot Coal Corporation currently owns andoperates 14 different mining facilities throughout the United States of America. In Appalachia,Patriot Coal facilitates numerous mines where their operations sold 24.3 million tons ofmetallurgical and steam coal (Patriot Coal). In the Illinois Basin, Patriot Coal mines produced6.6 million tons of thermal coal for electricity generating plants across the Mid-West (PatriotCoal). Most of Patriot Coals business is dealt within the United States ofAmerica; however20% of their sales come from international steel producers. They ship coal to electricity

generators, industrial users, steel mills, and independent coke producers (Annual Report). Foundon Patriot Coals website, their companys mission is to,

make safety their highest priority and the cornerstone of the relationship with our

employee, promote a high-performing organization by hiring and retaining the most

qualified people and maximizing their opportunities through personal growth and

development, engineer, build and manage our operations to enhance productivity and

ensure a competitive cost structure, be a steward of the environment and a good neighbor

in the communities where we operate, provide creative solutions for our customers

through utilization of our diverse sourcing capabilities and innovative contracting

techniques, honor our commitments and conduct our business with trust, respect and

integrity toward customers, suppliers, employees and regulatory agencies, and enhanceshareholder value through sound decision-making and growth from development of

existing resources and strategic acquisitions.

Patriot Coal Corporation is a leading producer and marketer of coal in the eastern United States,

with 14 current mining complexes in Appalachia and the Illinois Basin. The company ships to

domestic and international electric utilities, industrial users and metallurgical coal customers,

and controls approximately 1.9 billion tons of proven and probable coal reserves.

Since the time of Patriot Coals initial price offering (IPO), the stock price began at 17.5 dollars

a share, and has for the most part been pretty stable. Currently, during the period of PatriotCoals 2011 fiscal year, the stock price has fallen significantly. Early January, PCX stock was

trading at 23.19 dollars a share, and over the course of the year fell to what is now 9.89 dollars

per share. Reaching a high of 28.44 dollars, PCX began to decline at a slow rate; however, in

early August, there was a downward flag movement that forced PCX stock down to 12.16 dollars

per share (approximately a $13 loss). After the stock rallied from this flag, another sharp decline

happened in early September, declining from $14.33 to $8.46 per share to date, the PCX stock


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has rallied only briefly, touching $13.36 per share in early November.

Technically, PCX has had an unfortunate fiscal year so far. However, when a stock is compared

fundamentally and technically, the results may vary.

Patriot Coal Company has had very tough strategic decisions to make based on sales, stocks, and

operations due to the company being only four years old. This fundamental analysis will look at

the stock valuation, business performance, management behavior, and the credit risk. Due to

increased amounts of regulatory pressure where employees spend work time meeting regulations

and procedure; the result ends in lower production and a higher cost per ton (Annual Report,

7). Below is a chart displaying Patriot Coals revenues and expenditures


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As the figure shows, Patriot Coal lost a net total of sales of 1,972 tons of coal from 2009 to2010. Due to this lack of sales, the average price for a ton of coal raised 7.5% and this sharp

increase in price lead to only a .5% increase in revenue. As Patriot Coals stock is valuated,

certain ratios are shown below to help further understand the financial standing of this

corporation. Patriot Coals current Earnings per Share (EPS) ratio, given by Yahoo Finance, is

currently at -.77. Patriot Coals profitability per share is at -77 cents per dollar. Although the

EPS is a relatively small negative number, it still indicates Patriot Coal Company is currently


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losing money as a business; however they are not too far under to be disinterested in. Patriot

Coal Companys market capitalization is currently at $835.66 million, meaning the price of each

share multiplied by the number of outstanding shares reaches well over 800 million, showing

investors and the public that Patriot Coal is a large corporation. Using the EPS, the Price to

Earnings ratio can be used to see relationship between the price paid for a share and the profits

the company builds per share. Using the ration P/E = Market Price per Share / Earnings per

Share. (P/E = 9.18/-.77). The current P/E ratio for PCX is equal to -11.22, which is very

unattractive. The managers and the president Richard Whiting have realized losses and declining

profits and have focused their energy on emerging markets. Richard said himself, The slow

recovery of 2010 was an ideal proving ground for testing the strength and potential of our

initiatives. Emerging challenges that face Whiting and his coal company are a growing demand

for energy and coal, increased regulatory oversight, and issues with the geology of their work

sites. To strategically combat these issues, Patriot Coal is working on increasing their

metallurgic coal production by introducing two new mine locations. Along with domestic sales,

Patriot Coal has outreached to countries in Europe, South America, and Asia to meet theirdemand of coal for energy needs. Management sees safety as a high priority; thus they introduce

safety plans and procedures that effectively have knocked companywide injuries down to only

five in 2010, and they are working on obtaining zero a month. Meeting the market myopia, as

demand increases, Patriot Coal is looking to introduce seven new coal mines (Annual Report,

4). Unfortunately for Patriot Coal and stakeholders in the corporation, there are a few credit

risks involved in PCXs future. As described in page 12 of the annual report, the risks involved

with Patriot Coal include price volatility, unforeseen geologic conditions, equipment problems,

changes in economic conditions, changes in coal mining laws, availability of alternative energy

sources, increases in mining costs, new environmental laws and regulations. Credit risk for

Patriot Coal mainly comes from their spin off company Peabody and their marketing affiliates.Concentration of credit risk substantially resides with large utility customers, metallurgical

customers and Peabody. In 2010, approximately18% of our revenues was from a marketing

affiliate of Peabody (Annual Report, 30). However, it is Patriot Coals policy to independently

evaluate each customers credit risk before conducting business. Although Patriot Coals current

P/E and EPS are negative, through fundamentally analyzing their projections, goals, and steps

towards further profit; it is safe to say that Patriot Coal is on a road to success and plentiful

business opportunities.


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Part 3Stock Track Simulation Trading Game

Willis` Stock Trak Experience

As I began to play the Stock Trak game, I felt nervous, unprepared, and excited to begin myjourney through trading fake stock. On the first day, I decided to try investing in futures; in this

case, cocoa, wheat, and sweet crude oil.

10/5/201112:44 PM Market - Buy CL/X1OIL CRUDE (SWEET) 11/11

100 78.51 -10.00 0.00 USD /1.00

Futures

10/4/20111:54 PM Market - Buy ZW/Z1WHEAT 12/11

3 6.07 -10.00 0.00 USD /1.00

Futures

10/4/20111:48 PM Market - Buy CC/Z1COCOA 12/11

3 2,605.00 -10.00 0.00 USD /1.00

Futures

I did not want to spend too much money at first, because I was unaware of how much a futures price

would fluctuate over the course of a few days. I decided to purchase December wheat and cocoa

because I knew the price would be more stable at the time. I purchased the oil at November because

I thought the prices would spike higher than the price I bought at right before the contract was due.

The same day I decided to purchase my first stocks. I sat on my computer, logged on to cnbc.com,

finance.google.com, and finance.yahoo.com, as well as watching the news on CNBC. On the

websites that day, there is a section for industry leaders, and I saw that the coal industry had beenmoving up 10% on that day, so I invested in PCX and James River Coal Company JRCC.

Trade Date TransactionType

Symbol Company Name QTY Price Comm.* Amount* Cur Security

10/5/20111:11PM

Market -Buy

JRCC James River CoalCompany

400 7.30 -10.00 -2,920.00 USD /1.00

Equities

10/5/20111:08PM

Market -

Buy

PCX

Patriot Coal Corporation

350 9.30 -10.00 -3,255.00 USD /1.00 Equities

10/5/20111:02PM

Market -Buy

DELLDell Inc. 450 15.20 -10.00 -6,840.00 USD/1.00 Equities

Also, my roommate being in a finance class himself was playing a wall street journal stock game as
http://stocktrak.com/public/quotes/quotes.aspx?symbol=JRCChttp://stocktrak.com/public/quotes/quotes.aspx?symbol=PCXhttp://stocktrak.com/public/quotes/quotes.aspx?symbol=DELLhttp://stocktrak.com/public/quotes/quotes.aspx?symbol=DELLhttp://stocktrak.com/public/quotes/quotes.aspx?symbol=DELLhttp://stocktrak.com/public/quotes/quotes.aspx?symbol=PCXhttp://stocktrak.com/public/quotes/quotes.aspx?symbol=JRCC


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well; and he told me to invest in Dell.

Later on in the month, I began to trade more fearlessly and tried to invest bigger packets of money at

a time to increase my market return %. Investing in companies like CIC Energy, China Airlines, and

Enerplus Corporation, all gave me large returns on my investment for a few days/weeks. At the time

of Steve Jobs death and the release of the Apple 4S, I invested 78,514 dollars on Apple, where laterthat stock grew dramatically.

My biggest return on investment was the sweet crude oil. I purchased it at 78.51, and sold it at 85.45,

for 100 contracts thus giving me a ROI of $694,000.

My worst investment was a risk I took on First Solar Company; I spent $115,740 on 2,000 shares

hoping the solar industry was on a rise. Instead, it fell dramatically and I lost over $30,000.

FUTURES:

December Wheat: 3 Contracts: Profit: (5,287.5)

December Cocoa: 3 Contracts: Profit: (20,910)

December Coffee: 4 Contracts: Profit: (11,925)

December Live Cattle: 600 Contracts: Profit (57,600)

November Sweet Crude Oil: 100 Contracts: Profit 694,000

Total Contracts: 710

Total Profit: $598,277.5

STOCKS

This is a chart of my total profits/losses.

Total Shares: 21,500

Total Profit: (30,107)

Symbol Company Name QTY Profit/Loss

AAPL Apple Inc. 200 210.00

DELL Dell Inc. 450 265.50

ELC CIC ENERGY CORP 1,000 -678.20

ERF Enerplus Corporation 200 256.00

FSLR First Solar, Inc. 2,000 -24,400.00

HPQ Hewlett Packard Co. 200 652.00

JRCC James River Coal Company 5,400 -8,328.00


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LVLT Level 3 Communications, Inc. 800 -4,048.00

PCX Patriot Coal Corporation 5,350 806.50

PRU Prudential Financial Inc. 200 546.00

S Sprint Nextel Corporation 4,500 -3,600.00

SSYS Stratasys Inc. 1,000 7,820.00

ZNH China Southern Airlines Company Limited 200 386.00

I thought I did very well watching trends and following patterns such as flags, triangles, and

gaps; however, what I did learn is that to be a successful trader, you must watch your stocks

move multiple times a day and be up to date with all business news at all times. There were

periods were I did not check my Stock Trak for days or a week and by then I had lost so much

money due to fluctuations and dips in the stock. In all, I rate this experience as incredibly

helpful and highly addicting

Simones Stock Trak Experience

Simones initial strategy was very conservative: she stayed mostly in cash and only took out aminiscule stock position in Google, which eventually yielded a $93.11 profit with an 18% ROI(+$73.11, 14% ROI after commission). Later, she took on a trading strategy that could be

classified as the rogue trader because it mimics the strategy used by the rogue traders who lostbillions of dollars at firms such as UBS and Socit Gnrale. While this is obviously not thebest strategy to take, it is only in retrospect that she realized her errors.

As with all trades, Simones started with a solid foundation. She initially took 3 larger positions,all in commodities. She took long positions in October Gold and January Oil Crude (Sweet)while shorting the December Euro. She was in essence betting on the Euro contagion newsthat was coming out every day to bring the value of the Euro down and hence increasing thevalue of other commodities. She decided to cut this position when negative news about Italycame out yet the Euro still rose against the dollar. At this point she covered the Euro position ata loss of $.35 and sold the January Oil Crude at a $71.00 profit with a 3% ROI (+$51.00, 2%

ROI after commission). She also sold the October Gold contracts at a profit of $111.20 with a3% ROI (+$101.20, 3% ROI after commission). This is when things started to get a little out ofhand.

Simone figured since this was not real money, she could have a little fun and put on some extrarisk, just as the rogue traders she was "imitating" also treated it as a game because they wererisking other peoples money. At first this worked out for her. She took a massive long positionin December Gold futures, which started off wellshe was up over 10% in just a few days.
http://en.wikipedia.org/wiki/Soci%C3%A9t%C3%A9_G%C3%A9n%C3%A9ralehttp://en.wikipedia.org/wiki/Soci%C3%A9t%C3%A9_G%C3%A9n%C3%A9rale


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Then she got greedy. When gold dipped a bit, she decided to double up her position even thoughit would slightly raise her cost basis. She went against the technical signals hoping to ride themomentum, which proved to be an unsuccessful move. Gold dipped more. She doubled downagain by putting February contracts on margin. This vicious cycle continued and before sheknew it she had $1,039,000 on margin, which equated to over $19,000,000 exposure when

putting up 5% of the total contract value. Before commissions, Simone took a loss of $86,669.50(-$86,619.50 after commissions) from buying December Gold and a $104,997.00 loss frombuying February Gold (-$104,977.00 after commissions). Each yielded a -100% ROI. Theselosses could have been significantly lower had she hedged her positions.

Looking back, she could see many mistakes that she made. She was betting on weakercurrencies due to Euro instability and US sovereign debt. The combination of both, in theory,should raise the price of gold especially if investors are looking for safety. This position was nothedged and looking back, she would have considered buying puts for a strike price 10% underwhat the future contracts were going for. Simone also took too much risk and did not properlyhedge her positions. It is quite obvious that her initial small stock position was significantly less

risky than the large commodity positions she took later on in the game. This is mainly due to theimplied leverage of commodity futures. Commissions had a small impact on profits because thepositions were so large.

Stevens StockTrak Experience

Throughout the semester I made a few stock acquisitions including: Netflix, Dow Chemical, FuelTech, Sprint, and Patriot Coal in efforts to generate a return on the initial investment that I hadmade. As I began to think about which companies I would like to trade I decided that it wouldbe smart to follow these stocks for a few days and see what kind of pricing action is taking place.I would notice that perhaps after news is reported the stock might fall in price which is generallya better time to purchase as you are always attempting to make a profit. For example, afterNetflix reported disappointing earnings and the stock dropped well over fifty points in a fewdays, I decided to make an investment on Netflix and bought it at one of the lowest prices thatthe stock has ever hit. This decision proved to work well as I initially purchased 1,000 shares at$77.11 per share and then later in the day I purchased another 4,000 shares at $80.75. On myfirst transaction I placed a Limit Buy order at $77.11 which was executed on the opening. Thestock showed positive price movements so I decided at around 2 PM to place a market order for4,000 additional shares which were then purchased at the previously mentioned $80.75 position.In total I own 5,000 shares of Netflix at an average price of $80 per share. The stock price hadgone up to over $90 at a point at which in retrospect I have should have sold at because thecompany is now trading below the value I paid for my shares. Today my shares are valued at$69.74 (todays opening price) which ends up proving to be a net loss on this transaction of$51,410. Had I been more responsible with my trading and actually sold at the higher price Iwould have earned a profit of similar proportion. One thing that my father has always told meabout trading is that you can never be emotional with your stocks, meaning that just because theprice is skyrocketing or plummeting does not mean that you should go ahead and take actionwith them. The acquisition of stock, especially of a company such as Netflix should be looked atas investment, something that you will hold onto for a number of years which should hopefullymake you more money in the long run as the company continues to succeed.


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My acquisition of Netflix, to be honest, is one of the few transactions that I made which wasactually thought out and had decent reasoning behind it though I did invest carefully in a fewseparate cases as well. In addition to Netflix, I decided to invest in both Sprint and Patriot Coalas they were nearing they were both showing positive pricing movements during the week that I

made the decision to purchase. I purchased 1,000 shares of Sprint at $2.22 and 4,000 shares ofPatriot Coal at $9.24. These companies are now trading at $2.44 and $9.54 (todays opening)respectively. Again of this short course of time, there is not much opportunity to grow. Thesetwo companies did experience positive pricing movements; however, there was not enoughsupport at the higher prices that they had moved to, and therefore fell back to their respectivesupport levels which they are trading around today. In the short course I became profitable withmy acquisition of Sprint, making 22 cents per share to give an overall profit of $220. Though itis not much, it is still a decent profit to turn around in such a short period of time. My position inPatriot Coal also proved to be profitable as the company opened today 30 cents higher than whenI purchased it on October 13. In two short months I have been able to accrue a profit of $2,160which is a substantial profit for such a short period of time. I was able to gain a larger profit with

Patriot Coal because I took a much larger position with this company purchasing 4,000 sharescompared to 1,000 shares of Sprint. I do not exactly have reasoning behind this, more so that Ijust picked a number of shares without putting too much thought into the quantity; rather I placedmore of an emphasis of securing position at a predetermined price. For my purchase of Sprint, Iplaced a market order for the 1,000 shares because the company has been floating around its 52week low. With PCX, I decided to place a limit order at $9.25 as I wanted to purchase stock atthe lowest price in efforts to remain profitable in the long run because the stock was fluctuatingup to over $9.50 on the day I was purchasing if I do recall correctly. This position provided toinstrumental in providing a positive return on my investment at the end of this Stock MarketGame.

All the profits that I had been able to generate were commission free transactions and profits maynot have been profits had there been a commission rate to make a trade. For my transactioninvolving Netflix, the total purchase price was $77,110 for the first purchase and then $323,000for the second. A standard 10% commission on these transactions proves to be $7,711 and$32,300 respectively. When I go back and compare these new numbers with the previous lossthat I stated, we can see that I did lose only lose on my principle, I also would normally have topay these commission rates as well. Overall my position on Netflix, including commissionwould be a loss of $90,820. Similarly we can find that on my position with Sprint there wouldhave been a commission of $220 to make the trade which happens to coincidentally be the sameamount that I ended up making on the purchase and brings my net on this position to $0. Againwith Patriot Coal we can see that the total sale cost $39,960 and with a 10% commission rateapplied that would be an additional $3,996 that I would have to pay if I were trading in the realworld. After adding this negative amount to the profits of $2,160, we can see that again I endup losing $1,836 on the position that I took. From this we can gather that it is very difficult tomake any sort of money in a two month window in the stock market. The purchasing of stocks isan investment that one must be committed to holding onto for an extended period of time,whether it be one year, five years, or any number of years the holder desires. You are not goingto turn around a profit in a month or two and you may not even see a profit in one year. If you


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choose your investments wisely you hope to see continuing growth with your portfolio with thelonger you stay with your positions.

As you will look through my history of transactions, you will see that there are acquisitions ofmuch smaller, cheaper companies such as Fuel Tech, American Tower Corporation, Century

Link, Windstream Corporation, AmerisourceBergen Corporation, and Rydex S&P Equal WeightTechnology. These transactions were made with a little help from an analyst that I interned withover this past summer. I spoke with him and we discussed ways to generate large gains over theshort period of time that this Stock Market game encompassed. Granted he is far better educatedin this topic we worked a little bit on this and he helped to provide a comprehensive strategy tofollow in efforts to generate the most profit; however, at the end of the day it proved to be a bitconfusing for me at this point and I had decided to do away with his plan and see what I can doon my own. For your interest, I will include the strategy that he laid out as I am sure you wouldbe interested in reviewing his methods.


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Position Size Model

100,000$ Total trading capital

1.00% Money management stop

10 Max number of positions

10,000$ Max initial position size

1,000$ Max initial risk per position

94,636$ Initial capital invested

7,400$ Initial capital at risk

5,364$ initial cash balance

Sector Security Entry Stop Risk Potential Shares $Investment

Consumer Staple WER 33.52$ 31.50$ 6.03% 602.63$ 298 10,000.00$

Consumer Discretionar RTY 51.89 47.42 8.61% 861.44 193 10,000.00

Healthcare LKJ 17.80 16.60 6.74% 674.16 562 10,000.00

Financial ERK 18.02 16.47 8.60% 860.16 555 10,000.00

Energy ADB 72.22 65.22 9.69% 969.26 138 10,000.00

Information Tech CGB 39.72 37.53 5.51% 551.36 252 10,000.00

Telecom Svc BNE 40.00 37.53 6.18% 617.50 250 10,000.00

Industrial ERK 97.57 95.00 2.63% 263.40 102 10,000.00

Materials RYT 50.10 44.50 11.18% 1,000.00 179 8,946.43

Utilities SCLX 10.64 8.77 17.58% 1,000.00 535 5,689.84

POSITION SIZING MODEL






147,910$ Initial capital invested11,278$ Initial capital at risk


SECURITY ENTRY STOP RISK POTENTIAL SHARES $ INVESTMENT

WER 33.52$ 31.50$ 6.03% 602.63$ 298 10,000.00$

RTY 51.89 47.42 8.61% 861.44 193 10,000.00

LKJ 17.80 16.60 6.74% 674.16 562 10,000.00

ERK 18.02 16.47 8.60% 860.16 555 10,000.00

BTF 16.65 16.47 1.08% 108.11 601 10,000.00

ADB 72.22 65.22 9.69% 969.26 138 10,000.00

CGB 39.72 37.53 5.51% 551.36 252 10,000.00

ABC 76.67 70.00 8.70% 869.96 130 10,000.00

IBT 22.15 21.00 5.19% 519.19 451 10,000.00

BNE 40.00 37.53 6.18% 617.50 250 10,000.00

ABD 25.00 21.00 16.00% 1,500.00 375 9,375.00

ERK 97.57 95.00 2.63% 263.40 102 10,000.00

ERK 97.57 95.00 2.63% 263.40 102 10,000.00

RYT 50.10 44.50 11.18% 1,117.76 200 10,000.00

SCLX 10.64 8.77 17.58% 1,500.00 802 8,534.76

POSITION SIZING MODEL






218,623$ Initial capital invested

18,180$ Initial capital at risk


SECURITY ENTRY STOP RISK POTENTIAL SHARES $ INVESTMENT

WER 33.52$ 29.00$ 13.48% 1,250.00$ 277 9,269.91$

RTY 51.89 47.42 8.61% 1,076.80 241 12,500.00

KTS 20.00 17.60 12.00% 1,250.00 521 10,416.67

LKJ 17.80 16.60 6.74% 842.70 702 12,500.00

ERK 18.02 16.47 8.60% 1,075.19 694 12,500.00

BTF 16.65 16.47 1.08% 135.14 751 12,500.00

ADB 72.22 65.22 9.69% 1,211.58 173 12,500.00

ADB 72.22 65.22 9.69% 1,211.58 173 12,500.00

CGB 39.72 37.53 5.51% 689.20 315 12,500.00

ABC 76.67 70.00 8.70% 1,087.45 163 12,500.00

IBT 22.15 21.00 5.19% 648.98 564 12,500.00

PTS 84.50 80.00 5.33% 665.68 148 12,500.00

BNE 40.00 37.53 6.18% 771.88 313 12,500.00

ABD 25.00 22.00 12.00% 1,250.00 417 10,416.67

ERK 97.57 95.00 2.63% 329.25 128 12,500.00

CYA 8.43 7.80 7.47% 934.16 1,483 12,500.00

RYT 50.10 44.50 11.18% 1,250.00 223 11,183.04

RYT 50.10 44.50 11.18% 1,250.00 223 11,183.04

SCLX 10.64 7.00 34.21% 1,250.00 343 3,653.85

PNT 11.00 10.00 9.09% 1,136.36 1,136 12,500.00


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Conclusion

Throughout the semester we have learned a great deal from this course, but particularly the stockmarket game that we played. Using real-life scenarios through Stock Trak, we have learned thefragility of risk and price influences. Despite not using our own money, we believed that the risk

that we faced is real and the possibility of losing a great deal of money is possible as well. Thestock market game brings awareness to what it takes to be a successful trader and have aportfolio which remains positive.

By understanding losses, we believe we have learned how to take into consideration the manyfactors behind a stock or contract. Not only should one look at a current price, but he/she shouldresearch the business, its ideals, its financial and managerial history, and the status of theircompetitors and alternatives.

At first, we would focus on if a stock has been going up or down; but now we understand morethan a price fluctuates in patterns that can be predicted and taken advantage of. By being more

in tune with the importance of both technical and fundamental analysis, we have become betterat the game of trading.


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Sources

https://www.theice.com/productguide/ProductDetails.shtml?specId=7

http://www.wikinvest.com/wiki/Cocoa_Futures

http://www.wikinvest.com/commodity/Cocoa

http://www.patriotcoal.com/annualreport2010/2010-Patriot-AR-Full.pdf

http://library.corporate-ir.net/library/21/216/216060/items/286207/PCX040308b.pdf

http://www.sec.gov/cgi-bin/viewer?action=view&cik=1376812&accession_number=0001445305-11-003184&xbrl_type=v#

http://www.sec.gov/answers/spinoffs.htm

Images Used (In Order):http://www.wikinvest.com/images/thumb/6/67/ActualCocoaPrices.jpg/400px-ActualCocoaPrices.jpg

http://www.wikinvest.com/images/thumb/3/36/WorldCocoaProduction.jpg/400px-WorldCocoaProduction.jpg

http://classic.tradingcharts.com/marketquotes/quickquote.php?sel=Cocoa

http://www.barchart.com/chart.php?sym=CCZ11&t=BAR&size=M&v=2&g=1&p=D&d=X&qb=1&style=technical

http://www.patriotcoal.com/annualreport2010/2010-Patriot-AR-Full.pdf

Economics of Futures Markets Term Project

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Transcript of Economics of Futures Markets Term Project