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310196868

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

1

2

3

4

5

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.

3. What could you have done to improve your trading performance?
Whilst I was able to generate a profit, there are a number of areas I could have improved.
My ability to read the market could have been improved upon. The trades I made before the
first announcement were made using market data alone and were therefore not as informed
as the trades I made following the announcement. If I had not sold my shares before the first

I sold 12. I did not sell the majority of my shares at the most optimal price. 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. I could have also simply traded more. Throughout the simulation.36. As traders were exposed to the private information. 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. Price at Trade points 58 56 54 52 50 48 46 P1 : 35 P1 : 35 P1 : 36 P1 : 36 P1 : 36 P1 : 36 P1 : 36 P1 : 36 P1 : 36 P1 : 66 P1 : 66 P1 : 137 P1 : 176 P1 : 176 P1 : 176 P1 : 237 P1 : 296 P1 : 296 Price at Trade points . if the private information suggested that the true value of an asset was higher than the current market price. 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. Those with private information will attempt to use that information to gain an arbitrage benefit. closer to the price estimated in the private information. However.Had I been able to read the market better. the bid spread margin would reflect the new. the price was steadily increasing and simply trading small amounts on the margin would have generated additional profit. would then sell and buy such an asset at price closer to the true value. I would have been able to generate much more profit. For instance. In this simulation. assuming they were rational. I would have been able to increase my earnings. Furthermore. 4. In my apprehension of the price falling. As such. 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. Traders would consider the price the private information estimated and trade accordingly. If I was able to capitalize on the low price at the start of the simulation and purchase a greater quantity of shares. This increase in demand forced the price up. How was your private information impounded into the public price? Provide a graph. the private information consistently estimated that the true value of the asset was higher than the opening price.000 shares at a price of $55 which was unfortunate as the closing price was at $56. 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. I would have held my long position until the very of the simulation to maximize my profits. private information.[Type text] [Type text] 310196868 announcement. such a trader.

finding discrepancies in the market and true price and trading accordingly. traders are not always rational or make the correct trading decisions. How does the aggregation of information allow markets to be efficient? Efficiency in the market is the belief that all new information is compounded into market prices. this process is completed faster and offers a truer reflection on the actual price of the market. As soon as traders are aware of the changes. With all new information being released in a standardized format. I. They are then able to change their trading behavior based on the new information. the price would remain at its true value given that everyone else is aware of that value. the change in their behavior will be felt by the market and ultimately force them to become efficient as they impound the new information into the price. Assuming that traders were rational. It is this instant access to new market information that allows markets to be efficient. all traders and investors are privy to any new information updates instantaneously. This arbitrage trading behavior would set the bid –ask spread to reflect the true value of the asset. buy the asset for more than it was worth. 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. . Therefore. 6. this is assuming that markets are perfectly efficient which often times is not the case as in the real world. 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. the market would very quickly adjust to the true value of the asset as all rational traders attempt to score an arbitrage bonus. By aggregating this information. Of course. they would ideally not sell the asset for a price below its true value or conversely.e. At such a point.[Type text] [Type text] 310196868 5.