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Education Series – Alternative Investments

Education Series – Alternative Investments. Zachary Peskin Senior Analyst - Macroeconomy. Alternative Investments. Fixed Income Bills, Notes, Bonds Derivatives & Structured Products Currency Commodities. Fixed Income - Basics.

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Education Series – Alternative Investments

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  1. Education Series – Alternative Investments Zachary Peskin Senior Analyst - Macroeconomy

  2. Alternative Investments • Fixed Income • Bills, Notes, Bonds • Derivatives & Structured Products • Currency • Commodities

  3. Fixed Income - Basics • Bond: a debt security where the issuer is obliged to pay interest and/or repay the principal at maturity • Issued by: • Governments • National • local • Corporations • See last week’s presentation for valuation basics

  4. Fixed Income – Importance & Risks • Why should we care? • Part of a well diversified portfolio • Predictable income • Perceived as not risky (actually very risky) • Risks • Interest-rate risk • Credit risk • Counterparty risk (more on this later)

  5. How is Fixed Income Traded? • How are they traded? • Very different from stocks • Not on exchanges • Bid/Ask spread like other securities • Flow Traders • Range from very liquid to very illiquid • Key securities: • US Treasuries • 2 year • 10 year

  6. Yield Curve • Yield Curve • Bps • Why should we care?

  7. Fixed Income Alphabet Soup • CDS • CDO • MBS • ABS • RMBS • Basically anything with a cash flow can be securitized and traded

  8. Greek CDS

  9. Fixed Income - More Information • The Big Short – Michael Lewis • Bloomberg Terminal

  10. Currency • The largest market in the world (1 trillion +) • Used in everyday life • Especially important in cross-country investments • Important currencies: • USD • Euro • Yen • Yuan • CHF

  11. Global Currencies

  12. Uniqueness of a Currency Investment • Two sided nature of every trade • Currencies are quoted in terms of other currencies • Example: • Buy Euros • Implicitly short USD (or some other currency)

  13. The Ultimate Macro Play • To analyze most assets, need two views: • Company level • Macro level • Currency is exclusively a macro view • Factors that impact currency pricing: • Interest rates • Monetary/fiscal policy • Growth prospects • Regulation

  14. How is CurrencyTraded? • Round lots of 100,000 • Price quoted in terms of pips • Retail investors (like us) can invest in ETFs • Usually very liquid • Highly volatile • When an investors buys or sells a foreign asset an FX occurs • Instruments: • Spot, forward, swap, future, option

  15. Currency – More Information • Bloomberg Terminal (or others) for pricing • Wikipedia article on FX • Bloomberg video series on FX • Take a macroeconomics class that focuses on: • Central banks/monetary policy • International trade • Financial economics

  16. Commodities - Basics • Raw materials used naturally in manufacturing, food products, transportation systems, etc. • Examples: • Crude Oil • Gold • Silver • Wheat • Soy Beans • Orange Juice

  17. Commodities

  18. Commodities - Importance • Many products are derivatives of their underlying commodities • Huge driver of macroeconomic trends • Oil shortages during 1970s • Food prices causing riots in Egypt and Tunisia • Driver of geopolitical trends and conflict • Oil in the Middle East • Farmers in the Bread Basket • Certain countries are rich in valuable commodities

  19. How are Commodities Traded? • Regulated Exchanges • standardization • Spot trading • Forward contracts • Futures contracts

  20. Even More Funky Investments • Insurance Linked Securities • Cat Bonds • Convertible Bonds • Parking Meters

  21. Trading – A Holistic View • Exchanges • Equities • Options • Commodities • Derivatives? • Over the Counter • Fixed Income • Currency • Derivatives • High Frequency Trading

  22. The Reason For Complexity • To be able to capture all different risk/reward preferences • To be able to capture a view on the market • And maybe to confuse…

  23. Questions & Discussion • Where was I unclear? • What do you want to know more about? • The future of trading? • Complexity of investments…

  24. Next Week • Macroeconomic Indicators & More • GDP • Unemployment • CPI • Fed Funds • LIBOR • Inflation • Business Cycle • Fiscal/Monetary Policy

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