FINANCIAL ENGINEERING OF GLOBAL INVESTMENTS A SIMULATION Developments In Business Simulation & Experiential Learning, Volume 24, 1997 FINANCIAL ENGINEERING OF GLOBAL INVESTMENTS A SIMULATION Joseph M. Monahan, Dowling College Cynthia B. Goode, Monahan Associates ABSTRACT The investment opportunities of today encompass a wide range of tools available to not only corporations and institutions, but also to individual investors. The purpose of this simulation is to give the participants the knowledge and skills necessary to wisely invest in today’s global markets: and, to teach them how to protect their investments via financial engineering. The Investment Simulation is specifically designed to create a realistic investing experience, enabling each individual to design a portfolio meeting their individual investment goals. BACKGROUND The simulation starts by having participants evaluate their investment needs and define goals they would like to achieve in their investment activities. They will access their security and risk positions and begin developing an investment strategy suitable to them. Basic skills and jargon will be reviewed. Then participants will begin building their portfolios by selecting single stocks and be guided through the addition of additional investments during the entire course of the seminar. Several factors have necessitated investors and the business world to use Global Financial Engineering to protect themselves against undue risks, and to enable them to maximize their capacities: advances in technology, global sourcing, telecommunications, competition, trade alliances and increasing deregulation are examples of a few. The development of new financial instruments which are specifically designed for operating in the global market place necessitates business and investors to have a complete understanding of what these instruments are, and how they can best be used to maximize their benefits. METHOD At the start of the simulation participants are given a “Portfolio Objectives and Strategy Report”. This is to clarify in each investor’s mind exactly what their objectives are, placing an emphasis on areas like long term growth, aggressive income or risk reduction. Participants access their original goals and progress throughout the seminar, and are able to make adjustments based upon their increased understanding. Portfolio building will begin with participants receiving 500 units of stock (available in blocks of 100), then 500 units of bonds, and carry on through indexes, futures and options. At each of these stages, detailed explanations of each of the instruments’ uses are given so participants have a comfortable understanding of each instruments use. Each day, or week (depending upon the length of the seminar) participants are required to go “Market to Market”, thus accessing the performance of their portfolio on a continuous basis. Global Financial Engineering cannot be completely realized without a competent understanding of the foreign exchange markets and foreign exchange rate risks, therefore concurrent with our examination of the various securities markets, we will embark upon a detailed examination of the foreign exchange markets and how they work. The foreign exchange market is the largest of all markets today, the average daily turnover being 1 .2 trillion dollars. Any global investor, be it an individual or an institution. 80 Developments In Business Simulation & Experiential Learning, Volume 24, 1997 cannot ignore its effects on their investments. For this reason we will introduce our participants to the intricacies of all areas of foreign exchange trading. The foreign exchange market section of our simulation will include several topics, beginning with the Spot Foreign Exchange, Bid and Offer Spread, Direct versus Indirect Quotations, and a work exercise. After each participant has a competent understanding of the spot market, we will introduce them to the Forward Foreign Exchange Market, including: premiums and discounts, forward outrights, forward odd date and odd amounts, forward/forwards and swaps; and, of course, a forward trading simulation. The next section of our foreign exchange studies will include the various derivative instruments. Derivative instruments include the futures and options markets. We will discuss not only the mechanics of these instruments, but their uses in both financial arid securities trading. The intelligent use of derivative instruments is essential in both protection of assets and protection of asset value. Our topics will include: an introduction of foreign exchange derivatives, swaps, the mechanics of the foreign exchange futures market, foreign exchange forward swaps, and a futures trading simulation. After thoroughly examining the foreign exchange futures market, we will go on to the foreign exchange options market. As always, the implications and consequences of using this market, and strategies involved will be thoroughly discussed. The topics presented will be: an introduction to foreign exchange options markets, listed options contracts and a listed options trading simulation. Then we will proceed to over-the- counter foreign exchange options, their contracts, their uses and strategies for their uses. At the culmination of our seminar investors, both institutional and individual, will be fully versed on the intricacies of both the securities markets and the foreign exchange markets, therefore being able to intelligently invest and protect their investment via the use of Global Financial Engineering. RESULTS At the final “Portfolio Objective and Strategy Report”, the instructors and the participants are clearly able to see how each participant has used skills gained throughout this seminar to enhance their investment goals; and, how these goals may have changed due to a deeper understanding of the financial and securities markets. Likewise, participants are able to ascertain how the simulations have enabled them to clarify and redefine their investment objectives and attain their goals via the use of Global Financial Engineering. Each simulation participant will have designed a portfolio that reflects their individual needs; whether they be personal or corporate; and, whether the participant’s needs include simple monetary growth or the more sophisticated protection of assets and risk management. The Financial Engineering of Global Investments Simulation is specifically designed so the instructor can provide a realistic investing environment for the simulation participants. This simulation has been performed countless times in both classroom and workshop settings for several years. For participants with little or no investing experience, the simulation provides practical investment skills in a realistic format, thus enabling them to enter the financial world with knowledgeable confidence. For those participants with some previous experience, the simulation enhances their skills and broadens their financial expertise via the interactive use of all of the financial markets and tools available in today’s market. 81 Table of Contents Volume 24, 1997 Incorporating Computer Telephony into the MIS Course A Learner Oriented Infrastructure for videoconferencing Based Distance Education Courses The Identification of Temporally Related Structural Elements of the Experiential Component of Electronic Spreadsheet Tasks Does Involvement Influence Learning from Simulation Participation? Some Relationships with Helpfulness and Performance Outcomes Musings on Business Garne Performance Evaluation Performance on a TE Simulation: What does it represent? The Business Policy Game: An International Simulation - An Assessment Tool Students in Free Enterprise as Experiential Learning The Role of Computer Models in Wargames: A Practitioner's view Using Focus Groups as a Tool to Research Learning: A Demonstration and a Discussion Using Medical Simulations to Teach Multi-Cultural Diversity Using the World Game to Internationalize International Exchange Game Community Services Needs Assessment: An Innovative Approach Introducing Students to Potential Total Quality Management Ethical Dilemmas Privacy in the Workplace: A Situational Analysis Antecedents of Learning in Simulations Demonstrating the Learning Effectiveness of Simulation: Where we are and Where we need to go The Use of Computer Simulations as a Pedagogical Aid in Teaching Management Information Systems Evaluating Simulation Learning in a Distant Learning Instructional Model Financial Engineering of Global Investments The Labor History Game: Playing with the Past Perks Participation Assessing Negotiator's Proficiency with a Negotiation role-play The Art of Negotiating Enhancing Learning and Employee Development through the Assessment of Learning Pedagogy Preferences across selected Dimensions of Culture: A Preliminary Investigation Cooperative Learning: What are we Learning? Effective Use of Mastery Based Experiential learning in a Project Course to improve skills in system analysis and Design Simulations and Learning: Can we prove a relationship? (Seminar) Predicting and Reviewing NYSE Stock Prices by use of Basic Statistical Analysis and Logic Toy Car Depreciation Exercise ABSEL as Home Community: An Interactive Exploration Service Learning: Linking Academic Study to Community Development and Business Enhancement Ability of Efficient Evaluation of Knowledge-Based Management Strategies Corporate Ethics Training Programs Modeling Attributes in Demand Functions of Computerized Business Simulations: An Extension of Teach's Gravity Flow Algorithm Expert Systems Combined with Neutral Networks: Tools to Benefit the Marketing Researcher Computer Game Design: New Directions for Intercultural Simulation Game Designers Consistency in Simulation Performance over Time and Across Simulation Games The Impact of an Artificial Market Leader on Simulation Competitor's Strategies Business Plans, Case Studies, and Total Enterprise Simulations: A Natural Co-existence An Exploration into the Non-Use of Business Simulations The Market Game: Interactive Learning Through Market Simulation Plotting Brand Trajectories with the COMPLETE PPM package: A Market Segmentation Analysis and Positioning Tool Me and Mine Inc: An Exercise in Management Theory Learning to Differentiate Leadership from Managerial Position Business Ethics Survey: A Perspective from the Retail Industry Experiential Learning in Demand Analysis for an Agricultural Commodity Marketing on the Internet: A Pedagogical Exercise College Students Need Simple Computer Simulations, Especially for International Business Courses An Analysis of Student Attitudes, Performance, and Strategies in a Simulation Competition Based on a Controlled Product-Market-Entry Game Structure The Crystal Enterprise: Application of a Non-Computerized Simulation Model in a Process of Organizational Change Threshold: A Windows-Based Behaviorally Oriented Total Enterprise Simulation Coaching Business Game Teams Using a Decision Variable Optimizer Rock and Roll is here to Stay: Enhancing Experiential Pedagogy with Musical Exercises An Example of Business Process Analysis Simulation for Customer Software Support The Use of Business Gaming in Hong Kong Academic Institutions Using the Integrative International Simulation INTOPIA Mark 2000 in a Concentrated MBA Curriculum A Group Experience as an Integrated Part of the Core Management Course Empowered Learning in the Classroom The Inter-Group Interaction: An Innovative Approach to Cooperative Learning Courses that Utilize Student Team: An Approach to enhancing their Effectiveness Thoughts about the Measurement of Learning: The Case for Guided Learning and Associated Measurement Issues Measuring Student Learning Using Business Simulations: A Theory Based Perspective On the Use of PC Fingame in an Undergraduate Finance Course How Managers get Things Done: A Virtual Soundbite Internet Experiential learning in the Principals of Marketing Classroom: A Pedagogical Approach Current Student Perceptions Relative to Business Simulations Beyond Capitalism: Designing Business Policy and Social Justice The Use of Boards of Directors to Evaluate Reports and Presentations in an Undergraduate Business Policy Course Beacon Lumber: An Experiential Introduction to Financial Accounting The Application of Organizational Motivation Principles: The Experiential Business Simulation Motus Manufacturing Avoiding a Bogey: Grading Case Discussions Scientifically Communicating Consumer Behavior II: A Modified Exercise Using Personal Consumption Journals in Condensed Courses Designing Instruments for Assessing the Effectiveness of Simulations, (Seminar) 360º Performance Feedback: Appraisal vs. Assessment The Cafeteria Approach to Managing an Academic Career: Remaining Non-Perishable while Doing Your Own Thing An Experiential Exercise Related to Person-Organization Fit and it's Consequences For Today's Dynamic and Changing World, Business Simulations need to be expanded to encompass Much Greater Complexity: A Demonstration The Incident Process: A Case in Reverse Contextually-Anchored Business Simulations The Energy Factor: Building Motivation in the Simulation Gaming Environment The Design of an Internet Game