1. Finance Software Projects New York University Adjunct Instructor Scott Burton

2. FSP Introduction Background Plan for Semester First half: Individual submissions weekly Build foundational components and a server back-end Second half: Form 2 person teams Programming phases Build a risk management app typically used on a trading desk Presentation/demo at the end Periodic tests to check your programs and domain knowledge Programming phases evolving to final product Each team votes for best product and presentation

3. FSP Introduction (cont) Class Objectives Develop some software that is good! Organization Extensibility Testability Clarity Speed Size Accurate ? Learn some interesting aspects of financial markets! Implement living specs provided as spreadsheets Teacher Objectives Student Objectives

4. FSP Introduction (cont) Grading: Weekly programming phases 3 quizes on the “The Mythical Man-Month” Presentation/demo of final app Class participation Attending all classes will help your grade If you have to miss a class notify me in advance Missing more than two classes will hurt your grade

5. Financial engineering is built on 3 basic principles “Put a financial engineer on a desert island and give him only a few tools, such as the means to calculate the time value of money, the ability to contract on random outcomes, and a legal structure that allows the transferability of financial claims, and most of today’s financial instruments could be re-constructed.” “Origins of Value”

6. Financial engineering cont.. 1.“Time Is Money” “Inter-temporal value transfer” (aka a Loan) 2.“Negotiability” Suppose you have loaned someone money for a year. Now you need the cash. You could become a borrower yourself OR you could sell the contract to another person. It saves the trouble of a second contract and creates instant money 3.“Contingent Claims” Allows people to hedge themselves against the risk of an unknown future…

7. Capital Raising Has Money Needs Money Borrows money Issues a bond Financial firms facilitate Charge fee Wants a return (yield) Buys a bond Owns a security Can sell security later

8. Securitization “Turns cumbersome, illiquid financial contracts with governments or other entities (e.g., corporations) into liquid instruments of a smaller denomination that can be easily bought and sold in a capital market.”

9. Pricing function for a financial instrument To value a financial instrument and facilitate making them transferable we need a standard formula to price them. Allows us to calculate the price of a bond given the interest it is contracted to pay and takes into account the current prevailing market (interest rate you could get elsewhere for a similar instrument). Allows us to calculate sensitivities to hedge/speculate For a bond it’s the “Yield To Maturity” formula.

10. Capital markets concepts we will cover Primary / Secondary Sell-side / Buy-side Long / Short Relative Pricing Risk Transfer Proprietary / Flow Trading Exchange traded / Over the Counter Securitization

11. Trading Desk Structure Break... Continue with NYU_class2.ppt (FSP_investment_bank_structure on the site)

12. Deliverables for next week 1.Establish UNIX dev environment: GNU on real UNIX (Linux or Mac OS X) 2.Build and link the provided library and call the timer utility 3.“Conceptual Integrity” - which page does it first appear on Mythical Man-month?