FICC Coverage Group Fixed Income, Currency, & Commodities

Interest Rates and Swaps Interest Rates – Benchmark rate is the Federal Funds Rate (currently between 0% and 0.25% – FED just ended QE and it is expected that interest rates are going to increase by the end of next year – As interest rates go up, bond prices go down and bond yields go up. Interest Rate Swaps – Basic Definition: the exchange of a set of interest rate payments for another – Purpose: manage exposure to interest rate fluctuations or to get a better interest rate – Common Example: swap of a fixed rate for a variable/floating rate + LIBOR

Foreign Exchange Interbank FX market :  $5.3 trillion daily turnover (NYSE $50B/d, Global bonds $60B/d)  Originally conceived to circumvent exchange controls during 1970s  No centralized physical exchange (trading on interbank electronic networks)  USDEUR>USDJPY>USDAUD>USDCAD… WHY? – Comparative Advantage  Trade Facilitation & Hedge Risk  Benchmark Rate  Speculation FX Markets in the News 11/11/2014 London Fix Scandal +/-30 seconds 16:00 set benchmark HSBC, RBS, UBS, Citi, JPM collusion fined +$3.3B by US, UK, and Swiss Front-run clients & illegal disclosure

Corporate Debt Corporate debt securities: Using debt capital to raise funds for specific projects – Become a creditor of the company (Bondholders), not the owner – Often traded in OTC market Characteristics: – Dependent on corporation’s creditworthiness – Expect fixed interest rates and payment of principal value – Minimizes risks as an equity holder

Commodities Traditional Commodities – Hard Commodities (i.e. gold, silver, oil) – Soft Commodities (i.e. cattle, grain, coffee) Relatively New Commodities – Foreign currencies & indexes – Cellphone minutes & bandwidth Commodities market bearish but volatile… – Reverse supercycle Currently invested in a commodities ETF – Powershares DB Commodities Index Tracking Fund

Asset-Backed Securities – The underlying assets generate cash flows of principal and interest which can be repackaged and sold to investors. – Examples: MBS = mortgage backed securities CARS = certificates for automobile receivables CARDS = certificates for amortizing revolving debts HELS = home equity loan securities Fixed income assets Principal Interest Asset-backed securities