1. Why are they changing the stocks in the Nikkei 225 index and why does such a change portend heavy trading volume and potentially large swings in the prices of component stocks?
2. Assume you are managing an index fund that tracks the Nikkei 225. What would be your trading strategy to adjust your holdings around this reconstitution of the index? Assume that you are required to have zero tracking error every day. When would you try to execute your trades, what would you buy and sell?
3. Goldman Sachs is considering a few proprietary trading strategies to earn profits due to this event. How does the front running strategy work? Carefully describe the kinds of stocks you would buy and/or sell and when these trades would take place. You need to determine when you would trade to establish positions and when you would trade to close positions. What are the risks?
4. How does the Goldman contrarian strategy work? Carefully describe the kinds of stocks you would buy and/or sell and when these trades would take place. You need to determine when you would trade to establish positions and when you would trade to close positions. What are the risks?