The Queen’s Commerce Trading Competition

October 20, 2010

Agenda

1. Investing Framework2. Options Briefing3. Market Update - Earnings4. Market Update - Commodities

Meeting Schedule

Scheduled meetings for the rest of the term:

Wednesday, November 10th

Wednesday, December 1st

GDS Room 304

Table of Contents

Framework for Thinking

Etymology: Investing – Latin’s vestir (to dress up) Equity – 14th century’s Courts of Equity

What does a share’s price represent?

Why doesn’t the relative prices of two shares matter? Why does it?

EMH and Behavioural Finance

Efficient Markets Hypothesis: financial markets reflect all publicly-available information The very best investors don't even

try to forecast the future. Rather, they seize such opportunities as the present affords them – they are opportunists

Behavioural Finance: human behaviour causes inefficiencies And these mispricings can be

exploited

Investing Quotes

“Markets can remain irrational longer than you or I can remain solvent” – J.M. Keynes

The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high.“ – Dennis Gartman

Implications: Catching a falling knife analogy Greater Fool Theory Uncertainty & the quest for the “Truth”

J.M. Keynes

Derivatives - Options

Call Contracts

A call contract gives the holder the right, not the obligation to buy the underlying securities at a predetermined price within a specified time period in the future

Put Contracts

A put contract gives the holder the right, not the obligation to sell the underlying securities at a predetermined price within a specified time period in the future

Strike Price: “Predetermined price where the underlying securities change hands

Exercising: Activation/usage of the option contracts – the securities change hands

Expiration Date: The last date in which the options can be exercised

Writing/Buying: When writing options, a premium is generally charged to the buyer

Options – Cont’d

Payoff GraphsTypes

American: Can be exercised on any trading day before or on expiration, majority of exchange-traded options are American

European: Can be exercised on expiration

Bermudan: Can be exercised on specific agreed upon dates before and on expiration

Exotic Vs. Vanilla

Valuation

Black-Scholes Model- Delta (change in price), Vega

(volatility), Theta (time), Rho (risk-free rate), Gamma

Binomial Options Pricing Model

Recent Earnings Reports

Apple – shares down 3.4% (lower than expected profits)

Yahoo – Lack-luster profits (slightly lower profits)

Google earnings – lift tech stocks (rose 32 cents a share)

Bank of America posted Q3 profit losses JP Morgan profits rise 23% but recorded

the lowest profit and return on equity in years in the IB division

Goldman Sachs reported earnings in IB division

Morgan Stanley – hiring freeze and expected to report lower earnings today

Look out for Boeing, eBay, Altria Group, Morgan Stanley, M&T Bank, Wells Fargo, United Technologies today

Oil and Natural GasII. Who We Are

Natural Gas Price Oil Price

• Natural gas prices are quoted in $/MMBtu (million British thermal units)

• Currently hovering between $3 and $4

• Oil prices are quoted in $/bbl (barrel) • Currently around $82

Source: Henry Hub

• Large Canadian Oil&Gas players are Suncor (SU), Canadian Natural Resources (CNQ), EnCana Corporation (ECA) and Imperial Oil (IMO)

GoldII. Who We Are

Price A Case For Gold

• Gold is priced in $USD and prices are set on the world market

Source: Kitco

• Demand for store of value to hedge against currencies

• Increase in money supply => inflation• Increase in foreign demand• Supply remains static

5 largest Canadian gold producers PP Reserves (M. oz)

Annual Production (M. oz)

Goldcorp (G) 48.8 2.4 Yamana (YRI) 17.6 1.2 Barrick (ABX) 138.5 8 Kinross (K) 45.6 2.2 IAMGOLD (IMG) 14.3 0.95

• Gold ETF’S: SPDR GLD Trust (GLD)

Thank You!

Questions?

Visit www.theqctc.ca for more information