The Queen’s Commerce Trading Competition

1. The Queen’s Commerce Trading Competition October 20, 2010

2. Agenda • Investing Framework • Options Briefing • Market Update - Earnings • Market Update - Commodities

3. Table of Contents Meeting Schedule • Scheduled meetings for the rest of the term: • Wednesday, November 10th • Wednesday, December 1st • GDS Room 304

4. 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?

5. 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

6. 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

7. 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

8. Options – Cont’d • Types • 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 Payoff Graphs

9. 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

10. II. Who We Are Oil and Natural Gas 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 • Large Canadian Oil&Gas players are Suncor (SU), Canadian Natural Resources (CNQ), EnCana Corporation (ECA) and Imperial Oil (IMO) Source: Henry Hub

11. II. Who We Are Gold Price A Case For Gold • Gold is priced in $USD and prices are set on the world market • 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 • Gold ETF’S: SPDR GLD Trust (GLD) Source: Kitco

12. Thank You! Questions? Visit www.theqctc.ca for more information