Eco365 Trading Project Advice

  • May 16, 2021

1. Being as groups have at least 5 people a good rule is that each person should research one currency with an associated company or even a sector. This means each person has a great deal of autonomy. Groups with more than 5 people might research more than 5 currencies and companies or do more detailed research for the 5 currencies and companies. When groups have more than 5 and it is decided to trade more than 5 currencies or companies then every extra person can add 200,000 to the group’s investment capital. 2. Finance theory provides investors with an asset pricing formula but does not really predict how asset prices might change. Economics provides a great deal of insight as to how asset prices will change. The main point is that you do not need to have studied fifinance theory to construct a good project. You do need models we will study in eco365 as well as basic micro and macro theory. Both the foreign exchange market model introduced in ch. 2 and the open economy IS-LM model are good models to use for predicting currency movements. You might also use any conditions studied in ch. 3. Stock prices respond to higher profifits. A company whose profifit stands to increase during the next year will experience a rise its stock price very quickly; if profifit seems likely to fall over the next year the stock price will fall quickly. The reason for this is that investors build events that are expected to occur in the future into stock prices immediately. Both micro and macro factors affffect stock prices. If demand for the fifirm’s products is expected to rise or its costs are expected to fall then profifits should rise. The reverse is also true. Microeconomic factors affffect both demand and costs so these should be considered in the investment decision. But macroeconomic factors are also important since profifits rise during economic expansions (more prosperity creates rising demand). Recessions create falling demand. Be sure to discuss macroeconomic conditions when justifying investment decisions. Using current microeconomic and macroeconomic events such as product, cost or earnings developments, monetary and fifiscal policy, is critical to completing a strong project. Basically you’re using current events to determine how the curves in our economic models shift then making connections with stock prices and exchange rates. Several business periodicals are useful for current events and analyzing their implications. Consider The Economist, The Wall Street Journal, The Report on Business of the Globe and Mail and The Financial Times. Internet sites are useful for getting corporate earnings 1but you should look at something other than these sites for your information about economic policies and events. 3. Be sure to use macro factors to explain your investment choices. Many students get caught up in micro analysis of the company and forget they have to justify investing in a foreign economy as well. Macro factors will affffect both corporate profifits and the exchange rate. One common flflaw of assignments is to focus so much on the stock investments that the reasons for investing in an asset priced in a particular currency suffffers. Remember to justify buying assets in a particular currency. Being as profifits must be reported in Canadian dollars (CAD) this means a solid amount of analysis must be devoted to how the currency will flfluctuate against the CAD. Look at the sample trade for an example of the kind of analysis required. 4. You are free to bounce ideas for potential trades offff me during offiffiffice hours or by email. 5. Look at the sample analysis posted on Quercus for an example of the kind of work required. This is meant to be a guide or illustration rather than something to be imitated without variation. Remember, this is an opportunity to apply your knowledge of economics to investment decisions and be creative. 6. You should explain key price movements over the term. Typically part of your forecast will be accurate but unexpected events will occur. When a trade generates a loss explain what happened and why prices moved adversely using economic or fifinancial models. Grades are determined by the quality of the analysis. Always being correct about the price movements is not necessary. Reporting reasons why trades generated losses is a key part of the analysis. 7. Each individual should write up his own analysis but there should be a brief introduction describing the stocks and currencies analyzed. One person might write this or it might be a joint effffort. Motivations for examining difffferent companies and currencies can be included here with more detailed reasons presented in the body of the text. 8. Websites for price quotes are on the syllabus. You are free to fifind your own websites. 9. Events that are common knowledge do not need to be referenced or footnoted. But statistics on company earnings, GDP growth, inflflation and 2the like must be referenced. Look at the sample trade. It’s enough to state the stats then use a bracket with the author, date and page. If you use the opinions of stock analysts the sources must appear in the list of references. Failure to cite sources for statistics and lesser known facts in the body of the text as well as at the end of the project in a list of references constitutes a form of plaigarism 10. Citing the opinions of stock or currency analysts is fifine but discuss their views in depth. Again, emphasize why they expect something to happen. But it is more impressive if you make the connections yourself using models rather than relying on the views of some analysts. ll. Using technical trading rules is fifine but they should supplement fundamental analysis. Be precise about the mechanics of the technical indicator. But these indicators cannot be the focal point of your trading strategy being as you are graded on the quality of analysis. No one knows if technical signals are even valid or why they work in certain cases. Economic models are a superior vehicle of analysis so focus on them. Possible Companies: Weapons Manufacturers: Northorp Gruuman, Smith and Wesson, Colt, Lockheed. Food Companies: Monsanto, MacDonald’s Pepsi, Coco-Cola, Marks and Spencer. Automotive Companies: Ford, GM , Chrysler, Honda, Toyota, Voltwagon, Daimler-Benz Airlines: American Airlines, Airbus, British Airways Finance: Citi Corp, Chase Manhattan, Royal Bank, TD Bank, Loyd’s, Royal Bank of Scotland, Merrill Lynch Luxury Companies: Moet-Hennessy, Chanel, L’Oreal, Burberry Retail: Walmart, Amazon, Nordstorm, Target Construction Companies: Caterpillar Computer Companies: IBM, Dell, Samsung, Blackberry, Huawei