Time and compounding principles are central to every financial market.  For example, money markets operate both under different time conventions (referred to as daycount conventions) and different interest compounding conventions (simple interest, annual compounding, daily compounding etc.,).  FTS Interactive Markets allow these important concepts to be taught within the context of the price discovery problem using fixed income and related trading cases.  A trading case transforms calendar time into a virtual world where 1 year may equal 300-seconds and three years may be mapped into 15-minutes.  That is, although time is collapsed into virtual time the fundamental principles underlying the time value of money and how these concepts impact upon price discovery still apply.  For example, suppose the money market rate is 5% APR and one year equals 300-seconds this implies that $100 invested at 5% APR will increase to $105 at the end of 300-seconds. 

In the demo case B02 one trading trial covers three years of calendar time.  In the default case time is treated in the simplest way.  This is that FTS markets are open for the first day of each year and this trading day lasts for 240-seconds.  As a result, any positive cash position accrued in your money market account at the end of the trading day is held fixed for the year and earns the risk free rate (in the above screen the Risk Free Rate = 0.04 or 4% APR applied to the end of period cash balance).  Similarly, if your cash account is negative then you have borrowed cash at 4% APR.

Instructor Note:  A menu item is available in the central market program that provides a choice in terms of how both time and compounding conventions are treated in the FTS Interactive Markets.  For example you can change the time convention from trading day 1 of each year only to trading continuously through time for the year.  This makes the price discovery problem more difficult because the opportunity cost of capital is now changing throughout the trading period.  In addition, interest can be computed on either a simple or various compounding basis.  That is, a basic case that is designed to introduce how the time value of money impacts upon price discovery can quickly be turned into a more advanced time value of money trading exercise simply by changing the default menu settings in the central market program.  Refer to the online manual for further details.

Each subsequent period works in the same way as described above and the trading problem facing the trading crowd is to discover the price of each security in each trading period.