Mutual Investment Club of Cornell Education Series – Alternative Investments Zachary Peskin Senior Analyst - Macroeconomy 1

Mutual Investment Club of Cornell Alternative Investments  Fixed Income  Bills, Notes, Bonds  Derivatives & Structured Products  Currency  Commodities 2

Mutual Investment Club of Cornell 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 3

Mutual Investment Club of Cornell 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) 4

Mutual Investment Club of Cornell 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 5

Mutual Investment Club of Cornell Yield Curve  Yield Curve  Bps  Why should we care? 6

Mutual Investment Club of Cornell Fixed Income Alphabet Soup  CDS  CDO  MBS  ABS  RMBS  Basically anything with a cash flow can be securitized and traded 7

Mutual Investment Club of Cornell Greek CDS 8

Mutual Investment Club of Cornell Fixed Income - More Information  The Big Short – Michael Lewis  Bloomberg Terminal 9

Mutual Investment Club of Cornell 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 10

Mutual Investment Club of Cornell Global Currencies 11

Mutual Investment Club of Cornell 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) 12

Mutual Investment Club of Cornell 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 13

Mutual Investment Club of Cornell How is Currency Traded?  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 14

Mutual Investment Club of Cornell 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 15

Mutual Investment Club of Cornell Commodities - Basics  Raw materials used naturally in manufacturing, food products, transportation systems, etc.  Examples:  Crude Oil  Gold  Silver  Wheat  Soy Beans  Orange Juice 16

Mutual Investment Club of Cornell Commodities 17

Mutual Investment Club of Cornell 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 18

Mutual Investment Club of Cornell How are Commodities Traded?  Regulated Exchanges  standardization  Spot trading  Forward contracts  Futures contracts 19

Mutual Investment Club of Cornell Even More Funky Investments  Insurance Linked Securities  Cat Bonds  Convertible Bonds  Parking Meters 20

Mutual Investment Club of Cornell Trading – A Holistic View  Exchanges  Equities  Options  Commodities  Derivatives?  Over the Counter  Fixed Income  Currency  Derivatives  High Frequency Trading 21

Mutual Investment Club of Cornell 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… 22

Mutual Investment Club of Cornell Questions & Discussion  Where was I unclear?  What do you want to know more about?  The future of trading?  Complexity of investments… 23

Mutual Investment Club of Cornell Next Week  Macroeconomic Indicators & More  GDP  Unemployment  CPI  Fed Funds  LIBOR  Inflation  Business Cycle  Fiscal/Monetary Policy 24