Education Series – Alternative Investments

Mutual Investment Club of Cornell

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Education Series – Alternative Investments

Zachary PeskinSenior Analyst - Macroeconomy


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Alternative Investments

Fixed Income Bills, Notes, Bonds Derivatives & Structured Products

Currency Commodities


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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


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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)


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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


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Yield Curve

Yield Curve Bps Why should we care?


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Fixed Income Alphabet Soup

CDS CDO MBS ABS RMBS Basically anything with a cash flow can

be securitized and traded


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Greek CDS


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Fixed Income - More Information

The Big Short – Michael Lewis Bloomberg Terminal


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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


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Global Currencies


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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)


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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


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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


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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


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Commodities - Basics

Raw materials used naturally in manufacturing, food products, transportation systems, etc.

Examples: Crude Oil Gold Silver Wheat Soy Beans Orange Juice


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Commodities


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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


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How are Commodities Traded?

Regulated Exchanges standardization

Spot trading Forward contracts Futures contracts


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Even More Funky Investments

Insurance Linked Securities Cat Bonds

Convertible Bonds Parking Meters


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Trading – A Holistic View

Exchanges Equities Options Commodities Derivatives?

Over the Counter Fixed Income Currency Derivatives

High Frequency Trading


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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…


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Questions & Discussion

Where was I unclear? What do you want to know more about? The future of trading? Complexity of investments…


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Next Week

Macroeconomic Indicators & More GDP Unemployment CPI Fed Funds LIBOR Inflation Business Cycle Fiscal/Monetary Policy

Education Series – Alternative Investments

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