Investment Bank Structure (Typical Example of Primary & Secondary Trading)

1. Rates Structured Credit Equities Investment Bank Structure(Typical Example of Primary & Secondary Trading) • Govt/Agencies • Sovereigns (non US) • FX spot/options • Municipals • IR Swaps/Deriv • Money Market (CP) • Commodities • Corporates • Bonds • Derivatives • Mortgage-backed • Residential • Commercial • Asset-backed • Loans • Agency Business • Exchange Interfaces • Single Stock • Program Trading • Derivatives • Algo trading • AMM Custom Products: Financing Hedging Tax Strategies Yield Enhancement Ad-hoc Institutional Sales, Investment Banking, Capital Markets Proprietary Trading Risk Management, Product Control/Finance Research

2. Trading Function • Maintain competitive markets in their sectors as well as adequate liquidity in lead managed deals • Responsibly commit capital for clients and strategically position the desk • Use various parts of the capital structure and other financial instruments to hedge/mitigate risk and seek arbitrage opportunities • Determine appropriate bid/ask spread to maximize revenue while balancing volumes • Performance Metrics: • Trading volumes • Contribution of intellectual capital and idea generation • Individual P&L • Sector expertise • Primary Execution • Risk Managment

3. Sales Function • Responsible to cover 15-20 Institutional Investors • Disseminate markets and field inquiry • Communicate trading ideas • Distribute primary offerings • Serve as their accounts liason to the institution • Develop relationships to capture client flows and foster partnership • Gather market intelligence and investor feedback • Performance metrics: • Sales credits • Quality of business • Account influence • Information gathering • Desk protection and P&L enhancement

4. Risk Management Function • Independent & objective control function • Not P&L driven • Set and maintain trading limits • Credit (notional, potential exposure) • Market (Value at Risk, sensitivity, notional) • Operational (capital put aside for other risks which are not market or credit event triggered) • Measure and maintain adequate capital • Regulatory body interface • Drafting and enforcement of firm policies and procedures • Trade approval • Reserves management (more of a “finance” function)

5. Research Function • Maintain coverage of each of the debt issuers in a specific industry group, sector, country • Fundamental analysis to determine credit quality and forecast results • Macro-economic analysis, understand macro-trends • Assist sales force in it’s effort to distribute new issues and secondary axes • Synchronize the coverage universe with what is actively traded by the desk • Familiarization with covenants and terms for the various securities and derivatives in their space • Performance metrics: • Gather market intelligence and investor feedback • Institutional Investor ranking and overall franchise enhancement • New Issue contribution • Maintain a strong sense of relative value to increase hedging and arbitrage opportunities • Keep the desk positioned ahead of trends to maximize P&L and maintain orderly markets

6. Establishing a Brand • Create high visibility with accounts as market-makers and achieve “Top Tier Status” • Trade broad array of sectors to match our origination footprint • Underwrite high quality transactions and monitor after-market performance • Generate toll-collecting revenue, superior market intelligence, maximize desk liquidity • Consistent market-making - set the standard by being first to lead with prices in the morning or post • High level of transparency with accounts to gain trust and partnership • Maintain disciplined inventory management and be patient in waiting for opportunities (separate “flow” from “prop”) • Proactively establish and vet all larger risk positions and prop trades (“strategic aging”).

7. Role of Technology with Capital Markets • Risk Management - flexible ways to view and understand risk and correlation in the trading books • Superior analytics - having faster, steadier systes to process data better than the competition • Innovation - being on the forefront to develop new ways to exploit arbitrage opportunities by devising new tools • Maintenance - keeping systems up and running during the peak demands of market hours as well as allowing for enhancements and scalability • Education - teaching the business people how to use technology to more efficiently and intelligently do their day-to-day job

8. Time Value of Money The present value (PV) formula has four variables each of which can be solved for: PV is the value at time=0 FV is the value at time=n i is the rate at which the amount will be compounded each period (in decimal) n is the number of periods The cumulative present value of future cash flows can be calculated by summing the contributions of FVt, the value of cash flow at time=t M - “Maturity” (amount loaned) C - “Coupon” (return on loan) i - prevailing interest rate

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

10. Deliverables (2) - Quiz on Mythical Man-month chapters 1-6 • Start building your class library • Implement the “Present Value” function