IMPORTANT TELEPHONE NUMBERS: (626) 395-4876; (626) 395 - 4063; (626)
395- 4352
I. OVERVIEW
The notes given here are examples.
The actual number of securities and number of states may be different.
1. The markets
Your version of Marketscape consists of three different markets that will
be conducted in a sequence of trading periods. In two of these markets
securities will be traded. These two securities, SECURITY A and SECURITY
B, have a one period life. That is, the SECURITIES pay a single dividend
and are removed from the system at the end of the period. In the third
market instruments called NOTES will be traded. The NOTES are very special
instruments that allow you to borrow and loan money. The currency used
in all markets is called francs. Each franc is worth ______ (possibly sent
to you by email).
2. Timing of events
At opening of each period you will be given, as "working capital", a portfolio
of units of SECURITY A, units of SECURITY B and some francs (cash). The
time remaining in the period will be shown at the top of the main page
in Marketscape. You will be able to trade in the markets while the period
is open. At the end of the period all markets will be closed. The dividend
levels will be determined randomly and distributed according to the portfolio
you hold at the close of the period. Your income for the period consists
of the dividends on the securities you hold at the close, as well as the
cash you hold at that point, minus a predetermined payment (a "loan" repayment)
for the working capital you were given at the beginning of the period.
This income will be recorded as your earnings for the period. Your working
capital will be automatically refreshed and a new period will open. That
is, there is no carry-over of Securities, Notes or francs from period to
period. You are free to purchase and sell as many securities as you want
within the limits imposed by your working capital. Marketscape will not
allow you to purchase securities if you do not have the francs to pay for
them. Furthermore, Marketscape will not allow you to sell securities unless
you actually have them in inventory. That is, you cannot go short in securities
and you cannot purchase securities beyond the limits of your francs. However,
as will be explained below, you will be able to undertake limited borrowing
in addition to the working capital.
3. Dividend Determination and Trading Of Notes (Borrowing)
The actual dividends paid by Security A and Security B will depend on a
randomly drawn STATE. There are three possible states, referred to as X,
Y, and Z. States are equally likely. The dividend that a security pays
in each state is uniquely determined from the table that follows. Notes
have a special status as will be explained.
X Y Z
Security A 170 370 150
Security B 160 190 250
Notes 100 100 100
For example, if the state is X for some period, then the holder of Security
A will receive 170 francs for each unit held at the end of that period
and the holder of Security B will receive 160 francs for each unit held
at the end of that period. If the state drawn for the period is Y then
the numbers are 370 and 190 respectively, and if the state is Z they are
150 and 250. Notes are like bonds or IOUs that allow you to borrow and
loan francs. Selling a Note is like borrowing the amount of the sale price.
Buying a Note is like loaning the amount of the sale price. For each Note
you sell you must pay the holder 100 francs at the end of the period. This
payment will automatically be deducted from your francs and dividend payments
at the end of the period. That is, if you sell a Note for 75 francs you
have borrowed 75 francs and for this loan you repay a total of 100 at the
end of the period. Effectively "you repay the loan" of 75 francs plus a
25 franc "interest" payment. If you buy a note for 75 francs then
you have loaned the seller 75 francs until the end of the period and for
this loan you will be repaid a total of 100 francs, in essence the 75 francs
plus a 25 franc "interest" payment. Clearly no one should buy a Note
for more than 100 francs because it means that the buyer loaned more than
would be repaid. At the beginning of the period you will be given no Notes.
If you sell Notes your inventory will be listed as negative, indicating
that you must pay 100 francs on each of these, and if you buy Notes your
inventory will become positive indicating that you will be paid 100 francs
for each Note you hold. However, Marketscape will not allow you to sell
over eight (8) Notes (net) in any given period.
4. Initial Portfolio and Working Capital
At the beginning of each period you will be given working capital, consisting
of shares of Security A , shares of Security B, and francs cash. You will
not be given any Notes. The working capital you receive can be different
from the working capital received by others. For this working capital you
must repay a predetermined number of francs (a "working capital loan" repayment)
at the end of the period. A quick calculation will allow you to calculate
the expected payoff of the working capital. On average each Security A
will pay 230 francs per period [(1/3)(170+370+150)] reflecting the fact
that each of the dividends will be paid 1/3 of the time. On average each
Security B will pay 200 [(1/3)(160+190+250)]. The expected end-of-period
payoff of your working capital is thus 230 times the number of units of
Security A plus 200 times the number of units of Security B plus the number
of francs cash. Subtract from it the required "working capital loan" repayment
and you get your expected income from the working capital. For instance,
if you are given 4 Securities A, 4 Securities B and 400 francs cash, and
are required to repay 1700 francs for it at the end, your expected income
would be 420 francs (=4*230+4*200+400-1700).
II. HOW YOU MAKE MONEY
The following examples will help you understand the various possibilities.
Example 1. Do nothing.
Suppose you start and end with 4 units of Security A and 5 units of Security
B plus 400 francs. Your expected dividends from the securities are 920
francs (230 each times 4 securities) from the A Securities and 1000 francs
(200 each times 5 securities) from the B securities giving you a total
of 1920 francs expected (on average) dividends. Adding the 400 francs cash
yields a total of 2320 francs you expect to hold at the end of the period.
From this subtract the required working capital loan repayment for the
capital advance, say, 2100. Your earnings would be 220 francs (on average).
Suppose you start and end instead with 2 units of Security A and 7
units of Security B plus 400 francs cash, for which you are asked to pay
2100 francs at the end. A similar calculation will demonstrate that your
earnings would be 160 francs (on average).
Example 2. Play it safe.
This means that you sell all of your securities and loan out the money
(buy Notes) you receive in payment. Of course, in this case your earnings
depend upon the prices at which you transact.
Assume that you are given a working capital of 4 Securities A, 5 Securities
B and 400 francs cash. Assume your working capital loan is 2100 francs.
That is, you are required to repay 2100 francs for the working capital
at the end of the period. Suppose you are able to sell all securities at
their expected value, that is, at 230 for Securities A, and at 200 for
Securities B. This would produce 1920 francs revenue. Adding the 400 francs
cash with which you started gives you a total of 2320 francs. This guarantees
you an income of 220 francs (2320 cash, minus the 2100 francs repayment
for working capital). Now, these 2320 francs can be invested in Notes.
You could buy 23 Notes if you paid the full repayment value of 100 each
(of course you would make no profit in this case), but if you purchase
at less than 100 you make the difference on each Note you buy. Suppose
you could buy 25 Notes at 90 each (a total investment of 2250 francs of
your 2320). Each repays 100 so you make 10 on each for a profit of 250.
Your period earnings would be 220 +250 = 470 francs for the period. Of
course this calculation makes important assumptions about the prices you
received for the securities and the prices that you paid for the Notes.
Example 3. Speculate on price changes.
Anything you buy can be resold. If you sell at a price higher than you
paid you make the difference. This difference is in the form of increased
francs which you can then invest in either Securities or Notes and receive
the returns.
Example 4. Leveraging.
Sell all of your Security B and use the francs to purchase Security A.
In addition use your initial francs to purchase Security A. Finally, sell
all the Notes you are able and use the francs to purchase Security A.
As an exercise assume that prices are at the expected value of 230
and 200 for A and B, respectively, and that the price of Notes is 90. Suppose
you have 2 Securities A and 7 Securities B initially, and that you were
given 400 francs cash. You are required to pay 1700 francs at the end of
the period, as compensation for the working capital. Selling all of B generates
1400 francs; selling 6 Notes generates 540 francs. Together with the initial
cash allocation, you now hold 2340 francs in cash. With it, you can purchase
10 Securities A, at a cost of 2300 francs, leaving you with 40 francs cash.
At the end of the period, you will be holding 12 Securities A and 40 francs
in cash. You will be required to pay 600 francs for the (short) sale of
the 6 Notes, in addition to the 1700 francs you pay for the working capital.
If the state is X, Y or Z, your dividends would be 2040, 4440, 1800 respectively;
including your cash holdings of 40 francs, this would become 2080, 4480,
1840 respectively; the corresponding period earnings would be 220 (loss),
2180 (gain), 460 (loss), respectively.
Example 5. Fully invested hedge.
You might use your francs cash to purchase Securities B and also sell Notes
and use the proceeds to purchase even more Securities B. Since Security
B dividends are low in those states in which Security A dividends are high
your overall variability of returns is reduced. Security A pays a large
dividend of 370 if state Y occurs but it only pays 150 if state Z occurs.
By purchasing some of the Security B you will be able to "insure" your
holdings of Security A somewhat because Security B pays 250 francs in state
Z (50 francs above the average payoff of 200 francs). Of course you do
not make as much if Y occurs since Security B pays 190 in state Y.
III. HIGHLIGHTS OF PAGES AND FORMS
Order Form:
Found in the Market Summary page. Details will be found below.
Cancellations:
By clicking on the My Offers link for the appropriate markets in the Market
Summary page you can cancel orders.
The Book:
Click on the name of the security and you will view all buy orders and
all sell orders in that market.
Inventory Page:
This page lists your current holdings of Securities, Notes and francs.
It also displays your cumulative earnings.
History:
These links provide lists of all trades, or exclusively your trades.
Graphs:
These links provide graphs of the historical trading prices.
Dividend Summary:
This page provides the dividend payoff table for each security and detailed
information of the actual state, personal end-of-period holdings and income
for all previous periods.
Announcements:
Check this for messages.
IV. GLOSSARY OF IMPORTANT MARKET ELEMENTS
These are generic definitions and concepts used in Marketscape. Some of
this language might not apply to the markets that are currently operating.
ORDERS - orders are accompanied by a price. When you submit an
order you are saying that "your are willing to trade at the price stated
or at some better price." (more)
If you submit a SELL
ORDER you are saying that you are willing to sell to anyone at the
price you state, or at a higher price.
By submitting a BUY
ORDER you are saying that you are willing to buy from anyone at the
price you state, or at a lower price.
If no one accepts the order it goes unfilled. Your unfilled order remains
in the order book until it expires, is canceled by by you, or until it
is taken by another person.
An order LIMITS the amount you receive or the amount you pay
by the price you state.
ORDER QUANTITIES - You may place
orders for any number of units. The computer will automatically fill orders
if possible. If your order is for more units than can be bought or sold
at your price, the computer will partially fill your order. Partially filled
orders will remain on the order book until they are completely filled,
canceled, or the market terminates.
THE SELL ORDER BOOK - is a listing of the sell orders. The orders
are listed from highest order at the top of the page, down to the lowest.
The lowest is the BEST sell order from the buyers' points of view and it
is found at the bottom of the sell order book. Buyers will examine this
book when deciding whether or not to buy. Selling always stars at the bottom
of the book (the BEST) and then moves up. The market automatically matches
the cheapest existing order in the sell order book with an incoming buy
order to determine if a trade is possible. (more)
THE BUY ORDER BOOK - is a listing of the buy orders. The orders
are listed from lowest at the bottom of the page, up to the highest. The
highest is the BEST buy order from the sellers' points of view and it is
found at the top of the buy order book. Sellers will examine this book
when deciding whether or not to sell. Buying always starts at the top of
the book (the BEST) and the moves down. The market automatically matches
the highest existing order in the buy order book with an incoming limit
sell order to determine if a trade is possible. (more)
Should you send a SELL ORDER with a price lower than the best buy order
in the buy order book, then a trade will occur and your order will be filled
at the buy price, which is to your favor. For example, the best buy order
is 600, and you send in a sell order for 500. You will sell at 600 (instead
of sell at 500). The situation is analogous if you send a buy order. If
the best sell order is 500 and you send a buy order for 600. You will buy
at 500 (instead of buy at 600).
REMEMBER THAT THE INFORMATION DISPLAYED BY YOUR WEB BROWSER MAY NOT
BE UP-TO-DATE. So when you see a good offer posted in the book and
rush to send in a limit order to take it, there is the possibility that
someone may beat you to it and that your limit order will either be unfilled
or be filled by the next best available offer.