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‘DOTCOM CRASH’

‘DOTCOM CRASH’. AGENDA: Dotcom crash overview Financial products proposed : Volatility swap Strap Mixed strategy Marco Ticciati Rocco Letterelli. From 1995 financial markets started to show a tendency of technological stocks issued by technological firms to shoot up

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‘DOTCOM CRASH’

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  1. ‘DOTCOM CRASH’ AGENDA: Dotcom crash overview Financial productsproposed: Volatility swap Strap Mixed strategy Marco Ticciati Rocco Letterelli

  2. From 1995 financial markets started to show a tendency of technological stocks issued by technological firms to shoot up • The monetary policy was made to expand the monetary base by reducing interest rates in order to sustain the growth in the 90s • A combination of increasing stock prices, market confidence on profits, speculation in stocks, great boom in P/e ratio DotcomCrash: overview

  3. Itended up in 2001 • Higher interest rates • Unexpected news issuebymicrosoft • Panic and a lotoforderof sell Dotcom Crash overview

  4. 1)VolatilityswapWhatisit? Isanexchangebeetwentwopartsof a fixedvolatilityagainst the future volatility Buyer pays a fixedamount on notional(fixedvolatility) Isaninstrumentthatallowyouto take positions on volatility Seller paysto the buyer the future volatility

  5. Investorsuseitwhen in their opinion the impliedvolatilitywillbe high butthey don’t have precise viewsofit(tipical case are financialcrisis in whichtherecouldbenotconveniettousestraddles) • Investorsthinkthat the volatilitywillbehigherthan the last period(thiswouldbe fine in the case in whichthereis a election and change in government) 1)Volatility SwapWhyshouldinvestorsbuythisproduct?

  6. 2) STRAP Strap Construction: Buy 2 ATM Calls Buy 1 ATM Put Same underlying stock, strike price and expiration date. Straps are unlimited profit, limited risk options trading strategies that are used when the options trader thinks that the underlying stock price will experience significant volatility in the near term and is more likely to rally upwards instead of plunging downwards.

  7. Whyshouldinvestorsbuythisproduct? Uptrendbenefits Limited risk (max potential loss = cost of the strategy) Gain evenif the underling stock pricecollapses BUT webuy 3 at the moneyoptions: High cost

  8. LookingatFundamentalanalysis… Cisco's per-share-earnings for the preceding 12 months: 2nd Quarter 2000: .125 1st Quarter 2000: .065 4th Quarter 1999: .09 3rd Quarter 1999: .095 Trailing 12 mos.: .375 Cisco's closing price on the first trading day of April, 2000 was 74.94. That implies a price-to-earnings ratio of 199.84

  9. 3) Mixed strategy Construction: Buy 1 ITM Call (K1) Buy 1 OTM Call (K2) Sell 1 ATM Put (K3) Thisstrategyhas an unlimitedpossible profit, investors with positive expectations (in terms of underlyingprice) wouldfinditinterestingalsobecause the costisnot high A drawback: maxpotentialloss = cost of the strategy + K1

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