BULL'S EYE

The Trading Boundaries

Initial Money : $100,000 U.S
Instruments : Currency Options on Yen, Deutsche marks
Period of trading : 14thMay,1998 to 29th May 1998
Trading Horizon:

Japanese Yen

Short Term Outlook:
Japans latest stimulus for the economy has been described as "Many a little makes a mickle." This approach summarises the Japanese approach to structural reform. The hope is that many small changes will bring a major change in the business environment and in the vitality of the economy. It has not worked yet. The key question is whether this bundle of small actions will amount to a major change in the macroeconomic environment. Given the scenario, the yen is expected to depreciate.

Long term outlook:
The economy has yet to come out of the recession. The government has come up with fiscal stimulus of 16 trillion yen to stimulate the economy. The problems are far deep rooted, a total revamp of the financial system is required. Japan's attempt to export its way out of the internal economic problems

Deutsche Mark

Short term Outlook:
Strong March Retail Sales: March retail rise stronger than market expectations by 1.5% y/y March retail sales also gain 0.7% m/m in real terms Whopping rise by 3.9% m/m if car sales are taken into account
Potential market movers in Germany: An eye on monetary policy, April money supply M3 data. M3 growth surged to 5.1% in March as banks jumped on the stock market rally and loaded up their trading books. If this continues, it would be a worrying sign at a time when central banks including the Bundesbank nervously discuss the causes and consequences of asset price inflation. Yet, our main case is a slight slowdown in M3 growth from 5.1% to 4.7%, which would keep the Bundesbank comfortable with the present level of interest rates.

Strength in the DM: The markets greeted the smooth arrival of the Euro with some relief. In addition, the relatively smooth passage of the final few months of the process in which a large EMU was born without serious incident led to a feeling of 'Europhoria' -- the sheer novelty value of a new currency prompted significant cash flows into the DM.The outlook is positive and mark is expected to appreciate further

Long term Outlook:

European Monetary Union: EMU is becoming a reality. Bilateral exchange rates have been set for 11 of the 14 European currencies. Germany has been fore runner of the Euro union. In the six-month horizon the German mark is expected to appreciate from the current level of 5600 to 5200 due to gaining euphoria over European monetary union. The Mark is expected to come under pressure in Jan-99, when EMU becomes a reality. It is to be seen how the European central bank evolves a common monetary policy addressing the individual nations concerns. The analysts are sceptical on the success of common monetary policy starting Jan -99 and therewith expect a major crash in mid 99 on Euro currencies.

THE TRADING BONANZA

MARKET FLASH: 14^th May
Germany: Strong March Retail Sales :Elga Bartsch (London) March retail rise stronger than market expectations by 1.5% y/y March retail sales also gain 0.7% m/m in real terms Whopping rise by 3.9% m/m if car sales are taken into account Underpinning our consumer spending forecast

14 May, Thur: Based on our outlook of the Yen and DM, we have decided to construct the following portfolio:

Currency Option Types Maturity Strike Price Settlement Price No. of Options Portfolio Value Delta Portfolio Delta Gamma Vega Theta

Yen Long Puts Jun-98 7450 0.630 63 -0.5412 10.5590 0.1113 -0.00026

DM Long Calls Jun-98 5600 0.640 31 0.4930 -18.8126 14.2800 0.0843 -0.00014

USD Cash $787.50 $100,000.00

MARKET FLASH:15^th May
Germany: Consumer Spending Up, Watch Out for Ifo and M3.Consumers spent quite happily in the first quarter of this year. With March retail sales (including car sales) surging by a seasonally and calendar adjusted 3.9% on the month, first-quarter sales are up 1.5% (not annualised) from the fourth quarter. This supports the encouraging signals sent by the sharp improvement in consumer confidence since the start of this year.

15 May, Fri: Hold, Wait and watch for further trend.

Yen Long Puts Jun-98 7450 0.820 63 -0.5024 10.7239 0.1109 -0.00026

DM Long Calls Jun-98 5600 0.520 31 0.5160 -15.6552 14.2500 0.0833 -0.00014

USD Cash $787.50 $105,662.50

MARKET FLASH:18^th May
Germany: All conditions in place for moving to a higher growth path . Domestic demand set to take over from exports as engine of growth Bundesbank, ECB unlikely to spoil the party Advent of euro & Herr Schroeder should accelerate structural reforms

18 May, Mon: Hold, Wait and Watch. We made big money on YEN. J, A bit low on DM

Yen Long Puts Jun-98 7450 1.320 63 -0.4824 11.1892 0.1063 -0.00020

DM Long Calls Jun-98 5600 0.490 31 0.5236 -14.1596
14.8850

0.0797

-0.00014

USD Cash $787.50 $142,712.50

MARKET FLASH:19^th May
Germany :The strength in the DM has been due to several factors -- in the first place, the markets greeted the smooth arrival of the Euro with some relief. In addition, the relatively smooth passage of the final few months of the process in which a large EMU was born without serious incident led to a feeling of Europhoria

19 May, Tues: Hold. We still have big gains on YEN. J

Currency Option Types Maturity Strike Price Settlement Price No. of Options Portfolio Value Delta Portfolio Delta Gamma Vega Theta

Yen Long Puts Jun-98 7450 1.330 63 -0.4791 11.3628 0.1046 -0.00020

DM Long Calls Jun-98 5600 0.510 31 0.5363 -13.5580 15.0640 0.0783 -0.00150

USD Cash $787.50 $145,050.00

20 May, Wed: We are sitting on a big profit from YEN and believe yen can go either way so we decide to implement a STRADDLE so as to play on the volatility of this market. We sell 19 Yen 7450 Puts so as to buy 44 Yen 7450 Calls. We maintain our position in the DM.

Yen Long Puts Jun-98 7450 1.090 44 -0.5405 11.5813 0.1017 -0.00030

Long Calls Jun-98 7450 0.460 44 0.4549 11.5813 0.1017 -0.00018

DM Long Calls Jun-98 5600 0.780 31 0.5449 13.1255 15.2261 0.0769 -0.00015

USD Cash $1,375.00 $147,075.00

MARKET FLASH: 21 May
Japan: Two economic arguments for a less than horrid outlook for the Japanese economy have emerged from client meetings in Europe this week. One concerns the multiplier and the other the accelerator. The multiplier argument suggests that the most recent fiscal package might be more effective than earlier ones, because the weakness of the yen has reduced the propensity to import and thus raised the Keynesian multiplier on fiscal expenditure. The accelerator idea suggests that a turn of the economy will be accompanied by an more than proportional response from aggregate demand components, because part of the behavior of these components is tied to the change of income, rather than the level.

21 May, Thurs: OOPs the DM has been depreciating for the last 4 days,contrary to our view of appreciation. We sell all the DM 5600 Calls and buy 143 DM 5600 Puts based on our expectations that the DM is to depreciate further. We maintain our Yen position.

Yen Long Puts Jun-98 7450 0.750 44 -0.4956 11.7896 0.1011 -0.00028

Long Calls Jun-98 7450 0.670 44 0.5000 11.7895 0.1011 -0.00018

Currency Option Types Maturity Strike Price Settlement Price No. of Options Portfolio Value Delta Portfolio Delta Gamma Vega Theta

DM Long Puts Jun-98 5600 0.110 143 -0.4841 -69.0327 15.6919 0.0759 -0.00019

USD Cash $1,375.00 $118,800.00

22 May, Fri: Hold

Yen Long Puts Jun-98 7450 1.040 44 -0.4875 11.9865 0.0994 -0.00029

Long Calls Jun-98 7450 0.410 44 0.5083 11.9865 0.0994 -0.00018

DM Long Puts Jun-98 5600 0.100 143 -0.4885 -68.9403 15.9858 0.0746 -0.00019

USD Cash $1,375.00 $116,875.00

25 May, Mon: For the Yen, we fear that it will go down. Therefore, we decide to change the existing straddle to a BEAR SPREAD strategy. We sell all of our 44 Yen 7450 Calls and sell 44 Yen 7300 Puts (note the lower strike price of 7300).

Yen Long Puts Jun-98 7450 1.040 44 -0.4868 12.6936 0.0939 -0.00030

Short Puts Jun-98 7300 0.310 44 -0.3023 11.1242 0.0823 0.00025

DM Long Puts Jun-98 5600 0.100 143 -0.4572 -73.4976 16.7867 0.0703 -0.00020

USD Cash $40,975.00 $150,975.00

26^th May
Japan: "Many a little makes a mickle." This approach summarises the Japanese approach to structural reform. The hope is that many small changes will bring a major change in the business environment and in the vitality of the economy. It has not worked yet. The key qestion is whether this bundle of small actions will amount to a major change in the macroeconomic environment.

26 May, Tues: For the DM, we have been unable to provide a good forecast of its movement. So we decide to implement a LONG STRADDLE on the DM, as it has been volatile. We sell 101 of the existing 143 DM 5600 Puts and go long on 42 DM 5600 Calls to match the remaining balance 42 DM 5600 Puts. Note the same strike prices for 42 DM 5600 Calls and 42 DM 5600 Puts.

Currency Option Types Maturity Strike Price Settlement Price No. of Options Portfolio Value Delta Portfolio Delta Gamma Vega Theta

Yen Long Puts Jun-98 7450 1.930 44 -0.6589 12.1087 0.0829 -0.00030

Short Puts Jun-98 7300 0.770 44 -0.4717 13.1805 0.0901 -0.00030

DM Long Puts Jun-98 5600 0.120 42 -0.4443 17.0469 0.0688 -0.00020

Long Calls Jun-98 5600 0.670 42 0.5741 -2.7852 16.8516 0.0683 0.00016

USD Cash $925.00 $119,925.00

MARKET FLASH: 27^th May
Japan: Robert Alan Feldman (Tokyo) - A comparison of performance indicators between Japan and the US shows that Japan still has a very long way to go before structural reform measures can be credibly expected to raise potential growth. - Complacency about structural reform remains striking in many quarters.A strong first quarter GDP growth of over 3%. Germany: Euphoria as EMU becomes a reality.

27 May, Wed: We have doubled our money, we are tempted to close and runaway with profits. We decide to keep status Quo.

Yen Long Puts Jun-98 7450 1.670 44 -0.6662 12.2729 0.0805 -0.00300

Short Puts Jun-98 7300 0.590 44 -0.4675 13.4519 0.0882 -0.00030

DM Long Puts Jun-98 5600 0.290 42 -0.4834 17.6379 0.0676 -0.00020

Long Calls Jun-98 5600 0.460 42 0.4478 -10.2380 17.6237 0.0667 -0.00017

USD Cash $925.00 $203,975.00

28 May, Thurs: OOPS, the yen has moved up, we close out our position on the Yen when the Yen 7450 Put traded at 2.370 and the Yen 7300 Put traded at 1.080.

DM Long Puts Jun-98 5600 0.220 63 -0.3636 16.7992 0.0631 -0.00020

Long Calls Jun-98 5600 0.460 63 0.6331 0.2695 16.7992 0.0631 -0.00020

USD Cash $71,875.00 $178,975.00

29 May, Fri: We close out our position on the DM when the DM 5600 Put traded at 0.250 and the DM 5600 Call traded at 0.300. OUR NET PROFIT IS 58,000 DOWN FROM 100,000 A COUPLE OF DAYS BACK.

USD Cash $158,500.00 $158,500.00

Lessons From The Trading Bonanza

Short Term Trading

Trading on daily basis is highly speculative. It is hard to predict short-term movements in the currency. An immediate access to latest socio-economic data of the country is must. During our trading horizon, both Yen and Mark proved to be highly volatile

Profit Realisation:

Deciding at what stage to lock out the profits, was a big guess, playing on the highly volatile currencies, tendency to close out at the earliest stage was really tempting.

Work as a Team:

Given the short trading horizon and the unpredictability of the currency movements in the short run, forming a joint view on a currency movement was difficult task. Having taken a view, adopting a common strategy was challenging due to different risk aversion levels of the team members. Overall the team was able to design and implementing strategies, realising profits and a unique learning experience, which would have been impossible otherwise.

Overall It Was A Unique Learning Experience J

*Currency*	*Option Types*	*Maturity*	*Strike Price*	*Settlement Price*	*No. of Options*	*Portfolio Value*	*Delta*	*Portfolio Delta*	*Gamma*	*Vega*	*Theta*
*Yen*	Long Puts	Jun-98	7450	0.630	63		-0.5412		10.5590	0.1113	-0.00026
DM	Long Calls	Jun-98	5600	0.640	31		0.4930	-18.8126	14.2800	0.0843	-0.00014
*USD*	Cash	$787.50				$100,000.00

MARKET FLASH:15^th May Germany: Consumer Spending Up, Watch Out for Ifo and M3.Consumers spent quite happily in the first quarter of this year. With March retail sales (including car sales) surging by a seasonally and calendar adjusted 3.9% on the month, first-quarter sales are up 1.5% (not annualised) from the fourth quarter. This supports the encouraging signals sent by the sharp improvement in consumer confidence since the start of this year.
*15 May, Fri: Hold, Wait and watch for further trend.*
*Yen*	Long Puts	Jun-98	7450	0.820	63		-0.5024		10.7239	0.1109	-0.00026
DM	Long Calls	Jun-98	5600	0.520	31		0.5160	-15.6552	14.2500	0.0833	-0.00014
*USD*	Cash	$787.50				$105,662.50

MARKET FLASH:18^th May Germany: All conditions in place for moving to a higher growth path . Domestic demand set to take over from exports as engine of growth Bundesbank, ECB unlikely to spoil the party Advent of euro & Herr Schroeder should accelerate structural reforms
18 May, Mon: Hold, Wait and Watch. We made big money on YEN. J, A bit low on DM
*Yen*	Long Puts	Jun-98	7450	1.320	63		-0.4824		11.1892	0.1063	-0.00020
DM	Long Calls	Jun-98	5600	0.490	31		0.5236	-14.1596	14.8850	0.0797	-0.00014
*USD*	Cash	$787.50				$142,712.50

20 May, Wed: We are sitting on a big profit from YEN and believe yen can go either way so we decide to implement a STRADDLE so as to play on the volatility of this market. We sell 19 Yen 7450 Puts so as to buy 44 Yen 7450 Calls. We maintain our position in the DM.
*Yen*	Long Puts	Jun-98	7450	1.090	44		-0.5405		11.5813	0.1017	-0.00030
	Long Calls	Jun-98	7450	0.460	44		0.4549		11.5813	0.1017	-0.00018
DM	Long Calls	Jun-98	5600	0.780	31		0.5449	13.1255	15.2261	0.0769	-0.00015
*USD*	Cash	$1,375.00				$147,075.00

MARKET FLASH: 21 May Japan: Two economic arguments for a less than horrid outlook for the Japanese economy have emerged from client meetings in Europe this week. One concerns the multiplier and the other the accelerator. The multiplier argument suggests that the most recent fiscal package might be more effective than earlier ones, because the weakness of the yen has reduced the propensity to import and thus raised the Keynesian multiplier on fiscal expenditure. The accelerator idea suggests that a turn of the economy will be accompanied by an more than proportional response from aggregate demand components, because part of the behavior of these components is tied to the change of income, rather than the level.
21 May, Thurs: OOPs the DM has been depreciating for the last 4 days,contrary to our view of appreciation. We sell all the DM 5600 Calls and buy 143 DM 5600 Puts based on our expectations that the DM is to depreciate further. We maintain our Yen position.
*Yen*	Long Puts	Jun-98	7450	0.750	44	-0.4956	11.7896	0.1011	-0.00028
	Long Calls	Jun-98	7450	0.670	44	0.5000	11.7895	0.1011	-0.00018

*22 May, Fri: Hold*
*Yen*	Long Puts	Jun-98	7450	1.040	44		-0.4875		11.9865	0.0994	-0.00029
	Long Calls	Jun-98	7450	0.410	44		0.5083		11.9865	0.0994	-0.00018
DM	Long Puts	Jun-98	5600	0.100	143		-0.4885	-68.9403	15.9858	0.0746	-0.00019
*USD*	Cash	$1,375.00				$116,875.00

25 May, Mon: For the Yen, we fear that it will go down. Therefore, we decide to change the existing straddle to a BEAR SPREAD strategy. We sell all of our 44 Yen 7450 Calls and sell 44 Yen 7300 Puts (note the lower strike price of 7300).
*Yen*	Long Puts	Jun-98	7450	1.040	44		-0.4868		12.6936	0.0939	-0.00030
	Short Puts	Jun-98	7300	0.310	44		-0.3023		11.1242	0.0823	0.00025
DM	Long Puts	Jun-98	5600	0.100	143		-0.4572	-73.4976	16.7867	0.0703	-0.00020
*USD*	Cash	$40,975.00				$150,975.00

26^th May Japan: "Many a little makes a mickle." This approach summarises the Japanese approach to structural reform. The hope is that many small changes will bring a major change in the business environment and in the vitality of the economy. It has not worked yet. The key qestion is whether this bundle of small actions will amount to a major change in the macroeconomic environment.
26 May, Tues: For the DM, we have been unable to provide a good forecast of its movement. So we decide to implement a LONG STRADDLE on the DM, as it has been volatile. We sell 101 of the existing 143 DM 5600 Puts and go long on 42 DM 5600 Calls to match the remaining balance 42 DM 5600 Puts. Note the same strike prices for 42 DM 5600 Calls and 42 DM 5600 Puts.

MARKET FLASH: 27^th May Japan: Robert Alan Feldman (Tokyo) - A comparison of performance indicators between Japan and the US shows that Japan still has a very long way to go before structural reform measures can be credibly expected to raise potential growth. - Complacency about structural reform remains striking in many quarters.A strong first quarter GDP growth of over 3%. Germany: Euphoria as EMU becomes a reality.
*27 May, Wed: We have doubled our money, we are tempted to close and runaway with profits. We decide to keep status Quo.*
*Yen*	Long Puts	Jun-98	7450	1.670	44		-0.6662		12.2729	0.0805	-0.00300
	Short Puts	Jun-98	7300	0.590	44		-0.4675		13.4519	0.0882	-0.00030
DM	Long Puts	Jun-98	5600	0.290	42		-0.4834		17.6379	0.0676	-0.00020
	Long Calls	Jun-98	5600	0.460	42		0.4478	-10.2380	17.6237	0.0667	-0.00017
*USD*	Cash	$925.00				$203,975.00

28 May, Thurs: OOPS, the yen has moved up, we close out our position on the Yen when the Yen 7450 Put traded at 2.370 and the Yen 7300 Put traded at 1.080.
DM	Long Puts	Jun-98	5600	0.220	63		-0.3636		16.7992	0.0631	-0.00020
	Long Calls	Jun-98	5600	0.460	63		0.6331	0.2695	16.7992	0.0631	-0.00020
*USD*	Cash	$71,875.00				$178,975.00

29 May, Fri: We close out our position on the DM when the DM 5600 Put traded at 0.250 and the DM 5600 Call traded at 0.300. OUR NET PROFIT IS 58,000 DOWN FROM 100,000 A COUPLE OF DAYS BACK.
USD	Cash	$158,500.00				$158,500.00