International Finance Investment Project last part: Finance Report

Finance 480 Investment Project

Fall 2015

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Project Overview

This project relates to course learning goals. You will use simulated funds with real mar-

ket prices through the StockTrak website. There are a few required activities, beyond which you

may decide how risky or safe to make the portfolio, which investments to make, how often to

trade and so on. You will be graded on your analysis and discussion of, not the investment per-

formance of, your StockTrak activities.

You are expected to apply course material to analyze some of the investment and hedging

results, as explained below.

Permitted Assistance

Feel free to ask questions and discuss anything about the project with anyone. The trades,

calculations and writing for the written report are to be your own, but you may have anyone look

at your preliminary work and point out potential errors and needs for improvement. You may use

any of the College of Business Communication Center’s services.

Details

A table summarizing the detailed steps you need to take, the due dates and grading appear

at the end of this document. This section explains the steps.

Beginning of the Semester Tasks

1. On or before September 1, sign up for a free StockTrak account using this link:

http://www.stocktrak.com/public/members/registrationstudents.aspx?p=IState-Fin480-2015Fall

2. Read the information on the StockTrak website so that you become familiar with how it

works and the choices available by September 2. Please note that you have a practice account in

addition to the main account.

General Guidelines for StockTrak Activities

 Have fun.

 Try to learn as much as you can about the securities and derivatives you work with.

 Some aspects of trading in StockTrak are reasonably intuitive, but be careful. Sometimes

not all is as it appears to be at first glance. After trading, check back the next business day

to make sure it was executed. Remember to make the trades for your graded project in

your main account, not the practice account.

 Keep in mind that European stock markets will be closed by late morning here. Many

Asia-Pacific markets will have their morning opening in the later part of ISU’s evening

class period. StockTrak typically enforces actual market trading hours. It may let you

submit a trade after hours, but if so it will be executed the next day that the market is

open. Foreign markets have different holiday closings than U.S. markets.

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 Beyond the required hedged stock investments explained below, make any investments or

trades you wish, in any available market. You should make some trades with non-U.S.

exposure beyond the specifically required ones.

Required Hedged Stock Investments

Please read this whole subsection before starting to trade.

Invest in three companies’ stocks, one from each of three non-U.S. markets, each in a different

currency for which December 2015, or later, currency futures traded in the U.S. are available on

StockTrak. To see which currencies have December 2015 or later futures available, look at the

futures trading tab.

You may see some well-known U.S. companies cross-listed on foreign stock markets. Please

avoid using them for this part of the project.

Invest an amount in each stock that is approximately equal to the contract size of the correspond-

ing currency futures contract. You can see this by clicking on “contract specs” in the futures

trading area. For example, if you were going to invest in a South African stock traded in rand

(ZAR), you would invest about 500,000 rand.

For each company you invest in, hedge the currency risk that you bear as a U.S.-based investor

by making an appropriate trade in a futures contract on that currency.

Hold the stock and currency futures positions until at least November 12 but no later than No-

vember 30. Between 11/12 and 11/30, please sell the stocks and close out the futures positions.

Other positions in your account not related to this requirement can be kept after November if de-

sired. The account will stop working several days after the end of the semester.

General Requirements and Advice for the Project Report

A separate title page is recommended. Give the report a title, and show your name as the author.

Your ID number is not needed. Use an 11 -12 point font. Use at least one inch margins all

around. Number the pages. Submit the final paper in PDF. (Save As in Word can do PDF.)

The entire paper (including any tables and figures you choose to include) must be all in one PDF

file submitted through the designated Blackboard Assignments item. No e-mail attachments or

hard copies will be accepted.

Adopt a professional role of your choosing as the report writer, and write the paper for that role’s

audience. For example, you could pretend that you are a portfolio manager explaining to a client

why some trades in the client’s account were made and why they performed the way they did.

Assume that your audience is somewhat well educated about investing and reasonably comforta-

ble with numbers but lacks your in-depth knowledge of currency markets and so on.

Make this your best writing, with a professional style, correct grammar, spelling, punctuation

and word usage, and clear, informative, interesting content. As a formal report, it should have

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introduction and conclusion sections. The paper as a whole should flow logically from beginning

to end. If you include more than one table or graph in the report, each should be numbered; each

table or graph should be referred to by its designation (e.g. “the table” if only one, or Table 1 etc.

if there is more than one) in the body of the report. As a reminder, it is essential to fully attribute

any material that is not original. There is no minimum or maximum number of pages; avoid

omitting important information and discussion, and also avoid verbosity.

Specific Required Content to Include as Part of the Project Report

For each of the three stock investments in the required hedged positions, calculate and report the

rate of return earned on the stock itself, not considering the futures position. The rate of return in

the currency in which the stock trades (“local currency return”) can be calculated simply as a

one-period return based on the value received from selling the stock plus any dividends received

as the ending value and the amount paid for the stock including commissions as the beginning

value.

Calculate the USD rate of return on each stock from the local currency return and the rate of

change of the spot exchange rate as we learned in the course.

Repeat the process after adding in the gain or loss on the futures position in the same currency as

the stock. Thus, for each stock, you will have four rates of return, the unhedged return in local

currency and USD, and the hedged return in local currency and USD. In the paper, show how all

these returns are calculated. Make the data and calculations easy to follow by using carefully de-

signed displayed equations and tables. Show the numbers for each stock and futures contract that

are used in the calculations, but avoid long, awkward text paragraphs and overly detailed math

steps. Do include summary and discussion, focusing on meaning rather than steps, of any equa-

tions and tables in the main text of the paper.

Identify and discuss some factors that explain the performance of the stocks and the extent to

which each futures position protected your stock position against adverse currency movements or

prevented the position from benefitting from favorable currency movements. Be sure to apply

futures concepts learned in the course when possible.

In addition to the required hedged positions, select and discuss a small number of other invest-

ments or trades you made, why you made them, how they performed, and anything you would do

differently with the wisdom of hindsight but with no more knowledge of the future than you had

originally. Assume that you won’t be fired or sued (or graded down, provided you made a rea-

sonable effort to meet the investment requirements) for being honest.

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Summary of Required Components of the Project (Explained Above)

Component When to Start Due No Later Than Points; How Graded

Get an account As soon as possible 9/1/2015 10; TA checks Stock-

Trak

Buy three stocks As soon as desired; can be

on different dates.

9/28/2015 10; TA checks Stock-

Trak

Three futures

trades

Each on same date as the

corresponding stock trade

9/28/2015 or the

same day the corre-

sponding stock trade

is done if possible

10; TA checks Stock-

Trak

Sell stocks and

close futures

positions

Not before 11/12/2015 11/30/2015 10; TA checks Stock-

Trak

Some other in-

ternational in-

vesting or

trading

As soon as desired Continuous starting

no later than

9/28/2015

No specific points but

this gives you additional

experiences to mention

in the report, as well

learning and enjoyment

Report As soon as the stocks are

sold and futures closed out

12/7/2015 100; professor grades

based on overall quality

including writing and

analysis