Sales & Trading
Foward
A customized contract between two parties to buy or sell an asset at a specified price on a future date (can be customized to any commodity, amount and delivery date).
Derivatives
A security with a price dependent upon or derived from one or more underlying assets (EX: Futures, Forwards, Swaps, Options).
call option
An agreement that gives an investor the right, but not the obligation, to buy (call) a security at a specified price (strike price) within a specific time period (exercise date).
NYSE Composite Average
An index that measures the performance of all stocks listed on the New York Stock Exchange. The NYSE Composite Index includes more than 1,900 stocks, of which over 1,500 are U.S. companies.
NASDAQ Composite Index
An index that tracks the performance of all the securities traded on the Nasdaq Stock Market, which includes the world's foremost technology and biotech giants such as Apple, Google, Microsoft, Oracle, Amazon, Intel and Amgen.
S&P 500 Index
An index tracking 500 companies in various industries with a large amount of market capitalization. It is a capitalization-weighted index, meaning that stocks with higher market caps affect the average more.
Explain the current economic conditions in the U.S. What is your economic outlook?
Enhanced volatility due to high inflation and aggressive fed movements. Investors speculations are highly volatile and reflect the uncertainty of the feds rate hikes. My economic outlook is a stagnant 2023 with declines in the next few months and an offsetting increase in the remaining part of 2023.
Major Asset Classes
Equities, Fixed Income, Cash and equivalents, real assets
Explain the Financial Crisis
Essentially, the banks started giving mortgages to people who were in no position to buy them...
investment grade bond vs junk bond
Investment grade bond: issued by a company that has a relatively low risk of bankruptcy (AAA to BBB) and therefore has a low interest payment Junk Bond: Issued by a company that has a high risk of bankruptcy (BB to D) but is paying high interest payments
Company XYZ released increased quarterly earnings yesterday, but their stock price dropped. Why?
Most likely: Increased earnings figures they reported missed estimates OR Entire market or industry to which XYZ belongs could have been down on the day, which had more of an impact than the company's positive earnings
Gold (GC - COMEX)
Price Trend: Historically been a safe haven asset in times of high inflation. Expect the price to increase slightly and level out. Long term trend is expected to be downward given market rebound, investors will move money out of safe assets. Current Price: $2103.30
Crude Oil (CL - NYMEX)
Price Trend: Russia is keeping a price floor on oil. expect the price to rise to low to mid 80s in the coming weeks/months Current Price: $73.63
Tell me what a trader does.
Provides liquidity for the client
long position
Purchasing a security, commodity, or currency with the expectation that the asset will rise in value.
Hedging
Reducing the risk of an investment by making an offsetting investment. It is important to note that it also reduces profit.
What is CAPM? Why is it useful?
The Capital Asset Pricing Model (CAPM) is used to calculate the required rate of return for any risky asset. Your required rate of return is the increase in value you should expect to see based on the inherent risk level of the asset. CAPM is most often used to determine what the fair price of an investment should be. When you calculate the risky asset's rate of return using CAPM, that rate can then be used to discount the investment's future cash flows to their present value and thus arrive at the investment's fair value. Formula: Ra = Rf + Ba*(Rm - Rf)
Delta
The ratio comparing the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes referred to as the "hedge ratio." For Example: with respect to call options, 0.7 means that for every $1 the underlying stock increases, the call option will increase by $0.70.
default risk
The risk that an issuer of a bond may be unable to make timely principal and interest payments. The default risk is the risk of a given company not being able to make its interest payments or pay back the principal amount of their debt. All else equal, the higher a company's default risk, the higher the interest rate.
arbitrage (risk-less profit)
The simultaneous purchase and sale of an asset in order to profit from a price difference on different exchanges or marketplaces.
One stock is trading at $5, the other is trading at $50, which has greater growth potential?
The stock with higher growth potential is most likely the stock with the lower market cap, so if the $5 stock has 1 billion shares outstanding and the $50 stock has 10,000 shares outstanding, the $50 stock would most likely have higher growth potential
Delta Neutral
a portfolio strategy utilizing multiple positions with balancing positive and negative deltas so that the overall delta of the assets in question totals zero.
Correlation
a statistical measure of how two securities move in relation to each other.ranges between -1 and +1. 1 = Perfect positive : as one security moves, either up or down, the other security will move in the same direction. -1 = Perfect negative: as one security moves, either up or down, the other security will move in the opposite direction. 0 = None: the movements of the securities have no correlation.
Delta Hedging
an options trading strategy that aims to reduce the directional risk associated with price movements in the underlying asset
Liquidity
how freely an asset or security can be bought and sold on the open markets
Diversification
investing in a variety of securities/industries with different risk, reward, and correlations to protect the value of your portfolio if a single security or market sector takes a downturn. If investors are properly diversified, they can essentially eliminate all unsystematic risk from their portfolios, meaning that they can limit the risk associated with individual stocks so that their portfolios will be affected by factors affecting the entire market
Name a sectors that you are long. Name a sectors you are short.
long consumer staples, healthcare. Short consumer cyclicals, financials
nonliquid assets
micro-cap stocks, or a large, specialized factory or production plant that could take years to convert to cash (Real Estate, fine art, and collectables).
Highly liquid assets:
money market accounts and large-cap stocks. Cash is the benchmark
Treasury Bills
short-term United States government obligation with a maturity less than one year
What is insider trading and why is it illegal?
the buying or selling a stock based on information that is not publicly available. Investors cannot sell stock until information is released to the public.
secondary market
the market in which previously issued securities are traded among investors
vega
the measurement of an option's price sensitivity to changes in the volatility of the underlying asset
charm
the rate at which the delta of an option or warrant changes with respect to time. A second order derivative also known as delta decay
Theta
the rate of decline in the value of an option due to the passage of time. It can also be referred to as the time decay of an option.
Fischer Effect
the relationship between nominal returns, real returns, and inflation
Fundamental Analysis
the study of a company's accounting statements and future prospects to determine its value
Bid-Ask Spread
the transaction fee earned by the bank; the difference between bid (buy) and ask (sell) prices of a currency
Alpha
the volatility of an investment compared its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index
Black Scholes Model.
used to calculate the theoretical price of European put and call options, ignoring any dividends paid during the option's lifetime. (the model can be adapted to account for dividends by determining the ex-dividend date value of the underlying stock).
advantages of debt financing
- interest is tax deductible - the obligation is fixed in terms of interest & principal - no control of the firm is given up to new shareholders - debtors don't get excess firm earnings - debt is less costly than equity - during inflationary periods, debt is paid back with less valuable dollars
delta of an at-the-money option
0.5
Advantages of Equity Financing
1. Equity does not have to be repaid 2. Dividends are optional
Bond Risks
1. Interest: the price of a bond will change due to changes in prevailing interest rates 2. Reinvestment: an investor is UNABLE to reinvest capital at a previously earned rate of return. The investable cap is interest payments or return of principal from a called bond. (zero coups don't pay semi-annual interest so NO risk) 5. Credit/Default: the risk of default that an issuer cannot make interest or principal payments (use ratings to help evaluate credit)
What ratios do you use when valuing a company?
1. P/E Ratio - How much you're paying for each dollar of earnings 2. EV/EBITDA Ratio - The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. OTHER VALUATION RATIOS P/B Ratio - How much you're paying for each dollar of a company's assets D/E Ratio - Measures a company's debt relative to the value of its stock PEG Ratio - a stock's price-to-earnings ratio divided by the growth rate of its earnings for a specified time period. The PEG ratio is used to determine a stock's value while taking the company's earnings growth into account, and is considered to provide a more complete picture than the P/E ratio.
When should a company do a stock buyback?
1. Stock is undervalued 2. If the company has extra cash 3. Wants to increase stock price by increasing EPS 4. Send a positive signal to the market
Liquidity of Bond Markets
1. Treasuries 2. Corporates 3. Munis
How would you invest $10,000,000?
60% Equities (Growth), 20% Fixed Income (Predictability), 10% alternative investments (high risk, high reward), 10% Cash (Stability)
swap
A cash-settled contract between two parties to exchange, or "swap", cash flow streams (EX: an investor can exchange the returns from common stock for lower risk fixed income cash flows without having to liquidate his equity position).
How can a company raise its stock price?
A company can repurchase stock, which lowers the number of shares outstanding and increases the value per share. It can improve operations to produce higher earnings, causing its EPS to beat industry expectations, which will send a positive signal to the market. It can announce a change to its organizational structure such as cost-cutting or consolidation, which would lead to increased earnings.
Futures
A contract between two parties in which the buyer agrees to buy an underlying asset from the other party (the seller).
What is each desk in S&T divided into?
A corporate team and a financial institutions team
Beta
A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. 1 = volatility equal to the wider market. > 1 indicates greater volatility < 1 indicates less volatility
Blue chip
A nationally recognized, well-established and financially sound company.
Dealer
A person or company that trades securities on its own behalf. Acts as principal in a transaction.
Broker
A person or firm that conducts transactions on behalf of a client. Acts as an agent in a transaction.
What is the Efficient Market Hypothesis (EMH)? Given the EMH, do you think the stock market is efficient?
An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
bear
An investor who thinks the market, a specific security or an industry will fall.
Bull
An investor who thinks the market, a specific security or an industry will rise.
Bid Price
An offer made by an investor, trader or dealer to buy a security.
put option
An option contract giving an investor the right, but not the obligation, to sell (put) a security at a specified price (strike price) within a specified time period (exercise date).
Who is a more senior creditor, a bondholder or a stock holder?
Bondholder is a more senior credit because in the event of bankruptcy/liquidation, the bondholder will be repaid first. Additionally, interest payments are paid to bondholders before equity holders receive any profits in the form of dividends.
Treasury Bonds
Bonds issued by the federal government, sometimes referred to as government bonds. 10-30 years to maturity
Tell me about an interesting article that you've recently read in the WSJ.
Bryson Bank Term Funding Program article. Effect of QT to QE and $4.4 trillion promised
Primary Market
Corporations and other organizations, with the assistance of investment banks, create financial securities and issue them to the investing public. This is how companies raise capital.
List of Desks
Fixed Income (Bonds), Commodities, Currencies (Forex), Equities
Is 15 a high P/E ratio?
How many dollars an investor is willing to pay for a dollar of earnings -It depends on the industry, a P/E ratio of 15 in an industry like basic materials may considered a bit high, but if the company is a high-growth tech company, 15 may be considered rather low
Why sales & trading? Sales or trading and why?
I like dealing with lots of people (in person and on the phone), I enjoy working in a fast paced environment, I work well under pressure, I like the entrepreneurial atmosphere of the trading floor, I like working on a team, I am interested in the markets...
What does it mean to "leave money on the table" during an IPO?
If a company's stock price goes up significantly above the offering price, those gains go to new buyers of the stock, not the original owners of the company. Therefore, the original owners of the company left money on the table. Groupon gained over 50% during its first day of trading in 2011. The stock had an IPO price of $20, hit a high of $31 and then fell below $5. Groupon could have sold the same stock in its IPO at a higher price than it actually did. This happened a lot during the dot-com boom. Companies' stock would skyrocket on the first day of trading due to huge hype over the stock.
Delta movement
If an options delta is less than .50 it is said to be out of the-money. If the delta is greater than .50 the option is said to be in-the-money.
If a company's stock has gone up 20% in the last 12 months, is the company's stock doing well?
If the stock's beta is 1 (meaning it should be as volatile as the market and therefore produce market returns), and the market was up 30% over the last 12 months, the the stock is doing relatively poorly. In summary, it depends on the relative performance to the market. If it falls below the market performance, then the stock performed poorly.
If you add a risky stock to a portfolio, what happens to the overall risk of your portfolio?
It depends on the correlation between the new investment and the rest of the portfolio. It could lower the overall risk if the new stock has a negative correlation compared to the rest of the portfolio
When you look at a company's financials, what do you look at first, second, third and why?
It depends on the industry, but generally speaking, profitability is the most important. 1) Income Statement (profitability) 2) Balance Sheet (assets and liabilities) 3) Cash Flow Statement (free cash flow)
Stock Pitch #2
Long Salesforce
Stock Pitch #1
Long United Healthcare group
Tax advantage of municipal bonds
Non taxable. Puts upward pressure on prices and downward pressure on yields
IF you read that a certain mutual fund achieved 50% returns last year, would you invest in it? Example?
Past performance is not an indication of future results A mutual fund of mortgaged back securities could have been up 50% the year prior to the crisis, then down 90% afterwards
If you bought stock X a year ago for $10, sold it today for $15, and received $5 in dividends over the year, what would your overall return be?
Return on stock = Sale price + dividends - Purchase price ------> Therefore, return on stock X= 100% For stock X, that would be 15 + 5 - 10 = 10, or 100% ROI.
Why do we need S&T?
S&T allows institutional investors to buy and sell investments. It also helps support the primary market activity and capital raising efforts.
short position
Selling a borrowed security, commodity or currency with the expectation that the asset will fall in value.
Stock Pitch #3
Short Roblox
Technical Analysis
The ability to identify price and volume trends through the study of charts
default premium
The additional amount a borrower must pay to compensate the lender for assuming default risk. The difference between the yield on a corporate bond and the yield on a government bond with the same time to maturity to compensate the investor for default risk of the corporation, compared with the "risk-free" comparable government security.
Dow Jones Industrial Average
The best known U.S. index of stocks. A price-weighted average of 30 actively traded blue-chip stocks, primarily industrials including stocks that trade on the New York Stock Exchange.
Maturity Date
The date the bond will mature and the bond issuer will pay the bond holder the face value of the bond.
Face Value / Par Value
The face value, or par value, of a bond is the amount the bond issuer must pay back at the time of maturity. It is also the reference amount the bond issuer uses when calculating interest payments. -Bonds are typically issued with a $1,000 face value
Coupon Payment / Rate
The interest payment the issuer will pay to holders of the bonds. Bonds typically make payments annually or semi-annually It is the stated interest rate times the face value of the bond. EX: on an annual 10% bond with a $1000 face value, it would be $100
Buy Side
The investing institutions such as hedge funds, mutual funds, pension funds and insurance firms that buy large portions of securities for money-management purposes.
Sell Side
The investment banks involved with the creation, promotion, analysis and sale of securities.
corporate bond vs consumer loan
The main difference between a corporate bond and a consumer loan is the market that it is traded on. A bond issuance is usually for a larger amount of capital, is sold in the public market and can be traded. A loan is issued by a bank, and is not traded on a public market.
Bid-ask spread vs liquidity
The more liquid a capital market, the narrower the spread
Ask Price
The price a seller is willing to accept for a security, also known as the offer price.
How do you price a bond?
The price of a bond is the net present value of all future cash flows (coupon payments and face value) expected from the bond using the current interest rate. EX: Assume current interest is 7% on comparable bonds. The bond you are looking to invest in has a $100 face value and pay 10% annual interest. Since the bond you are investing in pays a higher coupon than bonds of comparable companies, you will be required to pay a premium for that higher interest rate, hence the $112.30 price, which brings the yield on the bond down to the level of comparable bonds.
Dark Pools
The trading volume created by institutional orders that are unavailable to the public. Gets its name because details of these trades are concealed from the public.
What would happen to the price of a put option if the company increases its dividends? Is the delta going to increase or decrease?
The value of the put option will go up because a dividend announcement causes a short-term decrease in price, which makes the put option more valuable.
VIX
The volatility index (VIX) measures expectations of volatility, or fluctuations in price, of the S&P 500 index. Higher values for the volatility index indicate that investors expect the value of the S&P 500 to fluctuate wildly - up, down, or both - in the next 30 days. VIX values > 30 are associated with a large amount of volatility as a result of investor fear, while values < 20 correspond to less stressful times in the markets.
Treasury Notes
United States government obligation with a maturity of 2 to 10 years
The #1 Thing a Trader Wants
Volatility, because more transactions = more money
Ways to value a company
comparable companies, market valuation, DCF, leveraged buyout, precedent transactions
Gamma
describes the rate of change in an option's delta per one-point move in the underlying asset's price This is called second-order (second-derivative) price sensitivity.
