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Construct A Graph of The Theoretical Fundamental Value of The Security Based On The Private Information Received
Construct A Graph of The Theoretical Fundamental Value of The Security Based On The Private Information Received
Construct A Graph of The Theoretical Fundamental Value of The Security Based On The Private Information Received
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1. Construct a graph of the theoretical fundamental value of the security based on the
private information received.
65
60
55
Series1
50
Series2
45
40
35
0
The graph below shows the difference between the highest and lowest price possible based
on the private information. The price of the asset is dictated on the vertical axis and the
horizontal axis represents the duration of the simulation.
2. How did you trade on this information? Was it profitable?
With the private information, I was able to make more informed trading decisions in my
simulation. Given that the private information suggested that the true value of the asset was
higher than the opening price of the asset, I established a long position for the majority of
the simulation. Luckily, I was able to purchase 30,000 shares at a price of $49.95 before the
first announcement of private information; which speculated that the assets true value was
$58.59. Over the course of the simulation, the private information speculated suggested
that the value of the asset would remain above my initial purchase price with a high
speculation of $59.92 and a low of $57.02. I unwound my position on three separate
occasions. I sold 12,000 shares at a margin of $.02 before the first announcement. The
remainder of my shares, I was able to sell at offer prices ranging from $55 to $56.63.
This trading strategy proved to be very profitable with total profits totaling up to $49.33 at
the close of the simulation. It was profitable as I was able to understand where the market
was heading and act on it accordingly to maximize my gain.
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announcement, I would have been able to generate much more profit. Furthermore, I did
not sell the majority of my shares at the most optimal price. In my apprehension of the price
falling, I sold 12,000 shares at a price of $55 which was unfortunate as the closing price was
at $56.36.Had I been able to read the market better, I would have held my long position
until the very of the simulation to maximize my profits.
I could have also simply traded more. If I was able to capitalize on the low price at the start
of the simulation and purchase a greater quantity of shares, I would have been able to
increase my earnings. However, this would have been risky as any large trades committed
prior to receiving any private information are less informed and have the potential to be
financially ruining.
The frequencies of my trading could have also been improved in the sense that I was happy
to sit back with my large long position and wait for an opportune time to strike. Throughout
the simulation, the price was steadily increasing and simply trading small amounts on the
margin would have generated additional profit.
4. How was your private information impounded into the public price? Provide a graph.
As traders were exposed to the private information, the bid spread margin would reflect the
new, private information. Traders would consider the price the private information
estimated and trade accordingly. For instance, if the private information suggested that the
true value of an asset was higher than the current market price, such a trader, assuming
they were rational, would then sell and buy such an asset at price closer to the true value.
Those with private information will attempt to use that information to gain an arbitrage
benefit. They will act upon prices that are either too low or too high and makes trades that
will benefit themselves and simultaneously bring public price closer to its new value.
In this simulation, the private information consistently estimated that the true value of the
asset was higher than the opening price. As such, traders began selling the asset at a higher
price in order to match the estimated value and obtain a profit whilst also attempting to buy
shares whilst the price had not yet increased. This increase in demand forced the price up,
closer to the price estimated in the private information.
The blow graph shows a limited view on the price movement throughout the simulation as it
only records the points at which I traded however it does show the impact of private
information on the public price.
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6. What would happen if everybody knew the final (true) value of the asset?
If everyone knew the true value of the asset then traders would only trade at prices that
matched the true value. Assuming that traders were rational, they would ideally not sell the
asset for a price below its true value or conversely, buy the asset for more than it was worth.
Therefore, the market would very quickly adjust to the true value of the asset as all rational
traders attempt to score an arbitrage bonus. I.e. finding discrepancies in the market and true
price and trading accordingly. This arbitrage trading behavior would set the bid ask spread
to reflect the true value of the asset. At such a point, I believe a stalemate would occur
where by traders would not want to trade above or below the true value of the price and as
such, the price would remain at its true value given that everyone else is aware of that value.