RIT Case Brief – F1 Build 1.01 Futures 1 You are the founder and managing director of Speculative Capital Corp, a managed futures macro hedge fund. After spending the past 6 months fundraising and promoting your abilities to ‘quickly respond and execute profitable trades based on macro-economic news”, you are finally ready to start your trading with $25 Million at your disposal. Your prospectus clearly limits your transactions to only one futures contract, the RTX 100 index. The RTX is an equity index made up of 100 of the largest North American companies diversified across all industries. You expect to make trades in reaction to macro-economic, geopolitical, and corporate news. The index is currently at 1050 and the futures contract multiplier is 250. As per your mandate, you will not carry a total exposure greater than 20 contracts at any given time. Futures Trading Simulation #1 – F1 In this trading simulation, you can purchase or sell futures contracts for the RTX. The purpose of trading futures, instead of the index itself, is because it is much more cost effective. You have a net trading limit of 20 contracts. This means that you cannot have a position larger than 20 contracts long or -20 contracts short. The case represents 1 month (4 weeks) of calendar time, and that month is simulated over 8 minutes of trading time (2 minutes per week). Discussion Questions and Follow Up: (1) Outline some of the advantages of trading index futures instead of the index itself? (2) Why is it a good idea to scale your position, and have larger positions when you believe there will be a large move in the index, and have smaller positions when you believe there will be a small move in the index? Kevin Mak* and Tom McCurdy** prepared this case for the RIT market simulation platform, http://rit.rotman.utoronto.ca/. *Manager of the Financial Research and Trading Lab, Rotman School of Management; **Professor of Finance and Founding Director of the FRTL, Rotman School of Management, University of Toronto. Copyright © 2014, Rotman School of Management. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording or otherwise – without the permission of Rotman School of Management. (3) What is the profit (or loss) generated on a position that is long 5 contracts @ 1050.00, if the price of the index falls to 975.00? (4) If the dollar-margin requirement for index futures is 5% of the notional value, what is the beginning margin requirement for a single RTX future? Copyright © 2014, Rotman School of Management. 2