Question

4. Suppose you predicted today’s economic impact of covid-19 back in

January. You decide to avoid trading stocks to keep from being caught by the

SEC for insider trading. Outline a trading strategy, which does not involve

stocks, that would maximize your profit on this information. Explain why

your strategy will result in the highest possible return using the concepts

from this course.

For simplicity assume you know only the following:

-the health industry will have above average profits

-the tourist industry will have below average profits

-economic growth will decrease and there will be high unemployment

Answer 1

In the given scenario, the trading strategy will involve buying mutual funds that is specialized in health industry. It will cause to earn high profit as health industry is going to profit from it and mutual funds based on health industry will grow in its net asset value. So, profit will be maximized.

If derivatives are used in trading, then the trading strategy will be to take long option or buy call option in health industry based options, so that higher profit is gained if price of the stocks of the health industry grow. At the same time, it is to take short position or buy put option so that when price of stocks of tourism industry falls, then profit is maximized.

Bonds that are issued by the tourism industry companies can also be purchased so that it gives healthy return. Since the rate of return will fluctuate, in the changing  economic conditions, then it is good to buy the bonds of these health industry companies so that profit is maximized.