Professional Documents
Culture Documents
Class Topic
Week 1 Introduction
What will the class cover?
Who should take the class?
Work and assignments
Week 2 Investment banking – who does what?
Investment banking (M&A)
Capital raising
Fixed income and equity trading
Sales
Research
Week 3 Structure of the financial markets
Corporate and government bond markets
Equity markets
Types of financial intermediaries
Week 4 Why and how do companies raise money?
Capital structure issues
Marketing, mandates, syndication and sales
IPOs
Week 5 Outside speakers
We will invite investment bankers to join us to discuss their work
Week 6 The structure of the investor base
What is the role of a financial market?
What kinds of investors are there?
What roles do each play?
Week 7 Fund management
Hedge funds, mutual funds, pension funds, etc.
Who does what?
Week 8 Trading
The role of traders
Risk management
Week 9 Outside speakers
We will invite traders to join us to discuss their work
Week 10 How traders evaluate markets
Week 11 Derivatives and structured products
Disaggregating risks
Using swaps, futures, options
Hedging new issues CBOs, CMOs, CLOs etc.
Week 12 Outside speakers: the life of an investment banker
We will invite newly hired bankers to join us discuss their work
Week 13 Review of material
Week 14 Exam
Class 1
In this class we will outline the goals of the course, discuss why it is important to
understand the markets, and go into a brief history of investment banking as a separate
part of the financial intermediation process.
Class 7
Outside speaker
Classes 9-10
The structure of the investor base is the key determinant of the maturity of a market.
Along with traders, whose function is to provide liquidity for investors, there are broadly
speaking three very separate types of investment strategies that account for almost every
investment activity. A well-functioning market requires all thee.
Types of players
Traders/market makers
Speculators
Arbitragers
Fundamental investors
Role of trader
Make markets for clients (market maker)
Provide market information to bankers
Profit from knowledge of supply and demand (speculator)
Profit from knowledge of pricing inconsistencies (speculator)
Risk management
Holding period risk
Secondary risks
Interest rates
Currency
Contagion
Arb Value
How does the structure of the market matter? Positive vs. negative feedback
Structural factor Behavior Impact
Substantial number of Tend to act against market moves by buying when prices Stabilizing
value investors decline against target price and selling when they rise
against target price
Existence of Buy undervalued assets and sell overvalued assets, Stabilizing
arbitrageurs thereby forcing pricing consistency and crossing markets
(which increases liquidity)
Margin owners of When prices rise, buying power increases, when assets Highly destabilizing
assets decline, selling pressure increases
Large open short Short covering on big price moves Stabilizing on the way down,
positions reinforcing on the way up
Large option positions Delta hedging Highly destabilizing
Program trading Delta hedging Highly destabilizing
Trend trading Buy rising market and short declining market Highly destabilizing
Holdings across asset When coupled with other destabilizing structures can lead Highly destabilizing
classes to contagion
Class 13
There have been a number of derivative instruments and securitization technologies that
have transformed the markets in recent years. In spite of all that has been
written about their complexities, they are basically variations on a few
instruments.
Disaggregating risks
Each risk can be separately sold to an investor best suited to take on the risk
Mortgage securities (interest-rate risk on payment streams, prepayment
risk, default risk)
Emerging market CBOs (short-term versus long-term risk
Combining risks
Allows investors to “get around” restrictions
Notes indexed to equity markets
Allows investors access to less accessible markets
Local currency indexed bonds
Allows investors to make complex bets
Inverse floaters
Provides a better mix of risks
Convertible bonds
Leverage
Leverage can be imbedded into product
Total return swaps, super-floaters, futures, options
Hedging
Investors or corporations can identify and eliminate risks they do not want
Treasury locks, commodity futures, commodity-indexed notes, floating-
credit-spread notes (like Argentina deal)