The Broker’s Preparations
Before every session, the broker must set the terms for the next stock swap session. For the demonstration, the broker’s terms are written in machine-readable form and as a text report. We will show the text report here. First of all, the broker needs to list all the players who have qualified to participate in the market for stock swaps. In the demo, the list is short:
players:
A
B
C
D
Next the broker fixes the prices for the stocks on the day of the swap. For the demonstration, we assume the broker deals only in the stocks of the DJIA and takes the prices from the previous closing quotations on the New York Exchange. The prices in the demo were fixed near the end of May 2008. Here is just a part of the stock price fixes used in the demonstration:
Prices:
AA = 40.33 (Alcoa Inc)
AIG = 36.76 (American International Group, Inc.)
AXP = 45.63 (American Express Company)
BA = 82.18 (Boeing Co.)
BAC = 33.91 (Bank of America Corporation)
C = 21.35 (Citigroup, Inc.)
CAT = 81.15 (Caterpillar Inc.)
CVX = 99.23 (Chevron Corp)
DD = 47.23 (E.I. du Pont de Nemours and Company)
DIS = 33.30 (Walt Disney Company (The) (Holding Company))
...
IBM = 125.30 (International Business Machines)
In order to prevent any confusion, the broker explicitly calculates the ratio of the stock prices for each pair of stocks. This ratio is the exchange rate during the swap. For example, in the demonstration, Player A is trying to swap Disney stock for IBM. A share of Disney stock is worth less than share of IBM. Thus a swap involves more Disney shares than IBM shares. :
Rate Table (partial)
HD HPQ IBM INTC
CAT 3.0223 1.7835 0.6476 3.4620
CVX 3.6957 2.1809 0.7919 4.2334
DD 1.7590 1.0380 0.3769 2.0149
DIS 1.2402 0.7319 0.2658 1.4206
GE 1.1307 0.6673 0.2423 1.2952
GM 0.6365 0.3756 0.1364 0.7291
Finally, there is the matter of how the broker gets paid. We assume that the buyer of the swap pays the broker if the broker can find a swap partner for mutually agreeable terms. The payment is a percentage of the cash equivalent of the swap, that is the number of shares times the share price. This item completes the broker’s preparation for the swap session:
Current Terms
Broker Fee: 0.1000
If you want to see the complete report on the broker’s terms click on this link,
