Reference no: EM133060005

One of the advantages of using simulation is that students (or any apprentice of financial trading) can make mistakes and learn from them. In a trading simulation, participants may receive "paper money" for investing in the financial markets (of course, everything is real but the money!). I used to set up a trading simulation and give my students "one million dollars" to invest. A few years ago, one student came to my office in a hurry. He had a pale face. I told him to calm down and asked him to explain what happened. He finally told me: "I lost $200,000 in 3 days! What can I do?" I must confess that I was surprised. I asked: How can you managed to lose $200,000 in 3 days? He said: "That's the biggest problem; I do not know. I do not know what I have done". "Well -I said- the good news is that it is not real money! Let's find out how you manage to lose 200 hundred thousand dollars in the financial markets in three days".

What are the possible explanations for this tremendous loss? In what type of securities did he probably invest? What can you do to avoid losing so much money and still invest in the financial markets? In your answer, explain in detail how you may lose (or gain) that amount of money in 3 days when investing in the financial markets, assuming that you just opened your account with $1,000,000.