An Inside Look at Investment Banking, 2014

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Asia’s Global Investment Bank www.nomura.com/careers

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WELCOME
You’ve probably heard a lot about investment banking in the news, and may even have a vague idea that you want to work as an investment banker. But how well do you really understand the industry? Do you want to work in equities or corporate finance? Will the buy-side or sell-side be right for you? Know your DCF from your EBITDA? And your spreads from your spots? It can all be a bit overwhelming, especially if you don’t know where to start. But that’s where we come in! This guide will tell you everything you need to know about investment banking: from the ins and outs of the sector, to the different roles and divisions, to what professionals think of their everyday work, and practical tips and interview advice. We’ve consolidated all of these juicy bits in one handy place so that you can make sure that investment banking is right for you, and also ensure that you only apply to jobs that you want. Securing a job in investment banking is not easy, especially in this economy. But with a little help from Inside Buzz you’ll have all of the tools necessary to wow in your interview and land that job as an investment banker. Good luck! The Inside Buzz editorial team

Copyright © 2013-2014 Inside Buzz Ltd. All rights reserved. No part of this publication may be reproduced or transmitted by any form or by any means, electronic or mechanical, for any purpose, without the express written permission of Inside Buzz Ltd. Whilst every care has been taken in the compilation of this publication, Inside Buzz Ltd. makes no claims as to the accuracy and reliability of the information contained within and disclaims all warranties. Inside Buzz, and the Inside Buzz logo are trademarks of Inside Buzz Ltd. For information about permission to reproduce selections from this book, contact: Inside Buzz Ltd, 14 Bateman Street, London, W1D 3AG +44 (0)20 7434 3600 [email protected] www.insidebuzz.co.uk An Inside Look at Investment Banking, 2014 Edition was designed by Lucie Mauger, www.luciemauger.co.uk. Inside Buzz Contacts Thomas Nutt, Inside Buzz Founder and CEO Tom McDermott, Head of Editorial Printed in the UK

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CONTENTS
THE INS & OUTS OF INVESTMENT BANKING
Investment banking explained................................................................................................. 9 Who’s who in an investment bank?......................................................................................... 11

CONTENTS

CORPORATE FINANCE

What is corporate finance? ..................................................................................................... 17 Who’s who in corporate finance? ........................................................................................... 18 My 24 hours in corporate finance: an IPO............................................................................... 20

SALES & TRADING Equities
What are equities? .................................................................................................................. 25 24 hours in equities.................................................................................................................. 29

Fixed Income

What is fixed income? ............................................................................................................. 30

Foreign Exchange

What is foreign exchange? ...................................................................................................... 32 My 24 hours in foreign exchange............................................................................................. 34

CommoditieS

What are commodities? .......................................................................................................... 36

WHAT YOU ALSO NEED TO KNOW

Buy side vs. Sell side: what are they, what the heck is a hedge fund and which role is right for you?.... .......................................................................................... 41 Investment banking vs. Investment management: what’s the difference and which one is best for you? .............................................................................. 45

THE BANKING INTERVIEW

Tricky interview questions....................................................................................................... 51 Interview Advice & Tips on Getting Hired................................................................................ 56 Analysing Financial Statements............................................................................................... 59

THE ABCs OF INVESTMENT BANKING..........................................................................

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WHAT’S IN THIS GUIDE?

The Ins And Outs Of Investment Banking

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Investment Banking explained
J.P. Morgan, Credit Suisse, Goldman Sachs, Morgan Stanley and Barclays. No doubt you are familiar with those staples of the investment banking landscape if you are at all interested in the world of finance. You may be thinking that a career in investment banking would be the ideal move for you. But do you know what investment banks actually do? It’s not a straightforward thing to explain, but let’s start by stating that it’s not investing, nor banking. Investment banking is really the raising of capital (money companies need to help their business grow) on behalf of clients by buying and selling securities (something that represents a monetary value, such as a stock or bond). They are not like retail or commercial banks because they do not take deposits from individuals. In the structure of a typical investment bank, you’ll find the roles are broken down into three categories, or places within the bank: the front office, middle The main difference between an investment bank and a commercial bank is that a commercial bank takes deposits. They have nothing to do with, for example, bond or stock markets like investment banks do and the deposits are the way that they raise funds. Think of a commercial bank as a kind of broker, providing loans and different types of accounts for individuals and companies. An investment bank plays with longer investments to try to make money.

THE INS AND OUTS OF INVESTMENT BANKING

“It’s not a straightforward thing to explain, but let’s start by stating that it’s not investing, nor banking.”
Companies that have turned into the investment banks we know today began by offering services called merchant banking. Sometimes this name is still used, but today people are more likely to call it corporate finance. These are services investment banks offer to helps companies raise capital so that they can improve their business. This can mean advising a company on buying another company, orchestrating an IPO or brokering a merger between two companies. In an investment bank today, the sales and trading of other instruments such as bonds, foreign exchange and commodities are lumped in with corporate finance under the umbrella of investment banking, though traditionalists would consider them slightly separate. But because banks have a commercial branch and an investment banking branch, sales and trading sit in the investment banking side and have started to become grouped together with the merchant banking activities.

office, and back office. The front office is really the face of the bank, they are the ones that have the most interaction with clients and actually perform the transactions. The middle office watches over the front office, making sure that they are not taking too much risk with the bank’s capital and that all regulatory rules and compliance procedures are followed. The middle office also includes HR and some other support roles. The back office handles the tasks of making sure the numbers are correct on all trades, as well as IT and assistant duties. In these pages we’ll break down this large industry to help you better understand how it all fits together, what the different divisions actually do, what daily life is like should you become an investment banker and how to ace your interview. But do you know what a derivative is? Or what a spot price means? Or how you go about valuing a company? If any of those questions intrigues you, then you are ready to delve into the wild world of investment banking.

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Who’s who in an investment bank
Investment banks are huge, multi-national corporations, so they need an army of employees to keep the business going. In its simplest form, an investment bank’s employees are broken down into three categories: front office, middle office and back office. Though there are a lot of different roles within each category, these broad divisions will give you clues as to whether a certain position is clientfacing, deals with internal policies or is tasked with making sure the bank’s image is maintained in the media. keep up on the markets and know what’s going on in the world at all times including political, social and economic issues. Many salespeople write daily roundups about their thoughts on certain markets and events and spend lots of time on the phone as well. There are many salespeople out there, but the successful ones maintain strong relationships with their clients by suggesting creative and lucrative trades that neither the client, nor competing salespeople have thought of.

THE INS AND OUTS OF INVESTMENT BANKING

“They need an army of employees to keep the business going.”

The front office is the face of the investment bank or fund. They meet with current and potential clients, execute the trades that make money and determine the direction of the company. The roles considered part of the front office include: Sales: Salespeople are responsible for speaking to their various clients, suggesting trades for them and communicating orders to the trading desk. Salespeople can deal with individuals, companies, investment funds and even hedge funds. All of their clients are called the “buy side” because they are the ones buying the securities. The investment banks themselves are considered the “sell side” because they are the ones that are selling investments. Sales people need to be able to multi-task and listen to various conversations at once. For example, if your traders are talking about a great deal or something in which they have a great price, you need to be paying attention to that conversation while at the same time thinking about which of your clients might want in on that trade. You will also need to

As the fictional Gordon Gekko said to Bud in Wall Street: “No, no, no, no you don’t understand. I wanna be surprised. Astonish me pal. New info – I don’t care where or how you get it – just get it.” Gordon’s spot on but a word of valuable advice: don’t do anything illegal to get that precious info!

Traders: Traders, of course, make the trades based on the orders from the salespeople and clients. But traders don’t just do what they are told by the salespeople! A trader’s main aim is to keep the investment bank liquid (make sure that assets are not tied up and can be sold easily with minimal loss. The most liquid asset is cash), so they will also perform trades where they make some profit on the spread. This means that they will buy (bid) a security at one price and sell (ask) it for a higher price, keeping the gain from the bid-ask differential. Obviously traders need to be good with numbers and be able to do quick calculations in their head. Though many traders focus only on one or a small section of markets (for example gold or cocoa) they nonetheless need to be able to multitask and pay attention to the tiny numbers changing on several screens at once. Traders also need to have the

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ability to make hard decisions very fast – if it looks like a trade may be costing money, but you’re not sure whether or not to get out of it, a few minutes’ indecision could see millions wiped off your book. If you are trading in international markets, be aware that you may be in for some long days and also have to trade from home in the middle of the night in a market on the other side of the world.

way up through the bank. Their main job involves maintaining relationships, networking and trying to impress potential clients. Corporate financiers: Corporate finance sits a bit apart from the other sales/trading divisions of the bank. They are not trading and making markets, but rather helping companies with certain financial situations. They act as a broker or consultant when companies need to raise capital, are looking to merge or buy another company or want to issue debt – all of which may enhance the value of their company. This can include helping to manage investments or even suggesting a mergers and acquisitions (M&A) strategy. In this instance, the corporate finance people at the investment bank will help the M&A deals go through. Corporate financiers must not only know what’s going on in the finance world, but also have clear philosophies on investing, stocks and how to value companies. You can use your creativity here by listening to what your client wants to achieve and then suggesting interesting and potentially groundbreaking ways they can go about making their thoughts a reality. Yes, the corporate finance team gets a lot of the glory and while salaries can go sky high, you’ll have to work hard for it. Investor relations (funds only): IR staff are responsible for PR as well as keeping all investors and shareholders abreast on what’s going on in the bank. Regular work can consist of putting together reports and setting up meetings and events for potential investors. IR work can also be unpredictable and involve lots of crisis management. Markets move very fast and this can impact funds positively and negatively and the investor relations team needs to make sure that they can answer any potentially uncomfortable questions that may arise. Like the name suggests, the middle office bridges the gap between the front and back offices. These are the kinds of roles that look into what is going on in the front office and makes sure it’s not negatively affecting the bank overall. The middle office is comprised of:

“The managing directors of the bank are the head honchos but usually have worked their way up through the bank.”
Research/Analyst: This is also considered a front office function. Basically, researchers research! They read tons of data, articles, and anything else they can get their hands on to help salespeople and traders make good calls about the markets. They also use their data to suggest trades and help guide the direction of the investment bank by constructing financial models. Analysts in the corporate finance department help with IPOs, specifically gathering the information for pitchbooks. Though not as client-facing as sales and trading, the research staff can be involved in client meetings from time to time. Analysts do have contact with all positions in the bank and often work closely with managing directors. The MDs main job is to cultivate various relationships with clients so they do not have time to know everything they need to know for a specific meeting or IPO pitch, and that’s when the analysts come in. MDs and associates depend on the researchers to provide them with the information they need to make successful deals and approach the right kinds of clients. They may not get much of the glory, and may be involved in several all-nighters, but it’s a fact that an investment bank would cease to run without the research department. MDs: The managing directors of the bank are the head honchos but usually have worked their

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THE INS AND OUTS OF INVESTMENT BANKING

Risk management: The biggest part of the middle office is probably the risk management team. These people make sure that the traders are not taking too much risk and that they’re not doing things like leaving their positions exposed overnight. Risk people also have the ability to cap how much traders can actually trade, if they feel that they are taking on too much risk. Employees in the risk department must not only be good with numbers but must also have the guts to stand up to traders who are being careless with their books. Compliance: Another important role in the middle office is compliance. This should not be overlooked as investment banks are now being scrutinised more

than ever; making sure every trade is done by the book is just as important as making money. The back office consists of all of those nitty-gritty roles that keep the place running smoothly. This includes: Operations: The operations people are the ones who check over every trade to make sure the numbers are correct and the trading desk has bought or sold what they were supposed to (if the trade was to buy USD but instead the ticket says selling USD, well then, you’ve got a problem). They also constantly reconcile trades and open balances with banks and other financial institutions. These are the editors and the proofreaders who make

Here are two cautionary tales of rogue traders causing major damage. They underline the importance of controls, risk management and effective oversight. Barings Bank: in 1995 London’s oldest merchant bank collapsed because of Nick Leeson, who was head of derivatives in their Singapore office. Leeson was meant to be arbitraging (meaning buying a futures contract on one market and selling it at a slightly higher price on another market almost immediately and making a small profit on the difference)futures contracts from the Nikkei 225 index which were listed on the Osaka Securities Exchange in Japan and the Singapore International Monetary Exchange in Singapore. But Leeson decided to hold onto his futures contracts instead of selling immediately because he was convinced that the Japanese market would strengthen and make him more money. When he was proved wrong he decided to start forging documents, for example saying that a £200 million loss was actually a £102 million gain. In the end he lost the bank £827 million, more than they had and there was no way to recover. Part of the problem was that Leeson was the trading floor manager and in charge of settlement operations, so when he began forging trade documents, no one saw. In the end he blamed the fact that no one at the bank could see how this arrangement could spell disaster and that people were too scared of looking foolish to do so and those that did think something was up were ignored. In 2008 it emerged that trader Jerome Kerviel at French bank Societe Generale, was forging fake index futures trades. Soc Gen has claimed that all of these rogue trades totaled 49.9 billion euro, way more than Kerviel was authorised to handle. When the bank eventually uncovered these illegal trades, they decided to get out of those positions immediately. Closing out those trades cost the bank 4.9 billion euro. Though Kerviel claims that what he did was practiced regularly by other traders, and some people think there must have been people helping him with the fraud instead of working alone, Soc Gen maintains that every few days before these positions would have triggered an automatic warning from the trading system, Kerviel would close out the trades and move them so that no one would find out. On the occasions that he was questioned, he would say that the trade was a mistake, cancel it and then create another trade with a different instrument to replace it. But because it was in another form, no one noticed. It would have taken a very eagle-eyed risk manager to have avoided this disaster.

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sure the execution is flawless. This is another role that may be overlooked by people on the outside, but any investment banker knows that a bad operations team can cause unnecessary headaches and completely mess up a profitable, well-working team. For an operations role you’ll need to be comfortable working on a variety of IT systems or at least learning them quickly. Of course, an eye for detail is extremely important as is good listening skills. If a trader asks you to check something urgently, they will be very upset if they have to repeat it. The operations team also communicates, usually by phone, with other operations teams as well as salespeople at the other banks who are doing business with them, so you’ll need a good rapport with people, especially when lots of money is on the line.

On 6 May, 2010, the Dow Jones Industrial Average suddenly plummeted 1,000 points. People struggled to figure out what could cause such a sudden, massive drop. One theory was that someone had purposely or inadvertently added a few extra zeros to a trade order to sell shares. After that some companies’ shares actually ended up trading at a penny! There was a 20 minute window when prices went haywire and all of those trades ended up being cancelled. There are all kinds of conspiracy theories as to the role of computers and electronic trading platforms in arguably the weirdest day the Dow has seen so far.

“The paycheck usually makes all that hard work worth it.”
IT: Another increasingly important role in an investment bank that is considered part of the back office is the IT department. No longer just fixing desktops that are slow, IT departments in investment banks are now in charge of complex computer networks, trading platforms, and communications systems. They may also be tasked with developing bespoke software to facilitate the bank’s trades and content management. And not only the upkeep is important, but also the security of those systems as well. If any sensitive information gets out, it could spell real trouble for the bank. Nowadays practically all trading is done electronically and sensitive information is also kept electronically.

Investment bankers are also always looking for easier and faster trading and content management systems so it’s up to the IT staff to suggest possibilities and implement them. Traders are also now increasingly set up to work from home so that they can trade out of office hours, another thing IT will have to look after. No one can do their job if the system goes down, something investment bankers will not tolerate, so the IT staff need to be proactive in systems upkeep as well as suggesting cutting-edge technology that will give the investment bank a clear edge over the competition. Investment banks deal with a wide range of financial instruments and clients, and therefore have tons of different roles to fill. The work is high-pressure and days can be extremely long, but it can also be satisfying, interesting and the paycheck usually makes all that hard work worth it.

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Corporate finance

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WHAT IS CORPORATE FINANCE?
Within an investment bank, the corporate finance team acts as a financial advisor for large companies, corporations and even some governments. When a corporation wants to grow the value of their company they will approach the corporate finance team at an investment bank to firstly, suggest ideas about how to reach their goals, and may also ask them to actually help broker the deal(s). Most of the time a corporate finance team will suggest a merger or the purchasing of a company or part of a company if the client wants to expand their business and increase profit. If the client wants to raise funds they might suggest an IPO (Initial Public Offering, also known as “floating”) – issuing stock – or advise issuing other securities such as debt. They may also bring up things like joint ventures, long-term investments, merger and acquisition possibilities, debt restructuring or management buy-outs (or buy-ins). The different suggestions may come about through financial modelling or simply a deep understanding of that particular industry/experience within that industry. plan for the future. One team may only deal with IPOs, one team may only deal with manufacturing companies, so once you are on a team, it is your job to know that industry inside and out so as to be able to advise your clients with expert knowledge. Keeping tabs on industry news and moves by other companies in the sector are important as well, so that when it comes to actually guiding an IPO, you price shares appropriately that will make the deal a success.

CORPORATE FINANCE

“Forget 9-5 or even 7-7, your hours are set by your clients and not the opening and closing of markets.”
Corporate finance is one of the most demanding areas of investment banking. Forget 9-5 or even 7-7, your hours are set by your clients and not the opening and closing of markets. But for all of those hours and hard work, you will be rewarded. Analysts are expected to crunch numbers and know about the clients, competitors and other potential clients in the industry. Associates are still responsible for data, but also have account management duties so are client-facing. Managers and VPs leave the details up to the analysts and are mostly concerned with keeping clients happy, fostering new relationships with potential clients and general networking to keep the bank in the know about industry moves. There are many different roles within corporate finance but all are challenging, interesting and can be very lucrative.

“Once you are on a team, it is your job to know that industry inside and out so as to be able to advise your clients with expert knowledge.”
Even within the corporate finance division there are lots of teams, each one handling a different way that the client can implement their financial

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WHO’s WHO IN CORPORATE FINANCE?
The whole corporate finance section is split up into deal teams and within those teams are the different roles. Though one team may only be concerned with M&A and another might only work with the oil industry, their structure is basically the same. Analysts First you have the analysts. They are at the bottom of the ladder and unfortunately, that’s most likely where you’ll have to start. Analysts do a lot of the not-so-fun work that is necessary for transactions to go through. As an analyst you’ll find yourself evaluating financial statements as well as reviewing things like management structure. You may also have to value a company based on similar companies in the same industry and see how your client measures up. to use a complicated mathematical algorithm dealing with risk, credit or interest rates. If you are an analyst, spreadsheets will become your best friends.

“Banks will have some nice perks such as free food and complementary taxis home in addition to the standard perks.”
If you are into maths, you may love being an analyst; or you may only be using the position as a way to move up. Either way, you will be worked hard as an analyst. A VP or director might have a hunch about a certain deal, but it is you who will provide the data to either back up or disprove his (unfortunately it usually is a his) theory. This means that you are on a short lead and cannot get anything wrong. Before you submit any work make sure it is double and triple checked for errors as well as grammar mistakes. Traditionally analysts work long and varied hours. If no deals are going on the office might be quiet and you’ll simply have to keep up on the news or maybe work on a new model you’ve been discussing with colleagues. But then it can seem like everything happens at once and you’ll have so much work that leaving the office after midnight will become a regular occurrence. You could be working on a pitchbook for an IPO one day, then handling the models for a proposed merger the next, then making changes to the pitchbook, then doing some last-minute writing for a transaction on little notice. Analysts are expected to work fast and provide the data asked for without questions (since directors are only concerned with selling the bank to clients, they will usually promise them multiple reports, models and presentations in a few days’ time, which means you might have to pull some all-nighters to get it all done). But banks

“First you have the analysts. They are at the bottom of the ladder and unfortunately, that’s most likely where you’ll have to start.”
After analysis comes the financial modelling that will tell the team if a proposed deal is a good idea or not and from there you’ll draw your conclusions as to what the best strategy is – does the client need to raise more cash? Should they be purchasing a competitor or is it better to let a competitor purchase them? You might already know what DCF Analysis is, and that is an example of a financial model. There are many other kinds of models and which ones you’ll use obviously depends on which team you sit, but you could be tasked with looking at balance sheets to predict a company’s future profits, thinking broadly about a company and its situation (what if this happens or what if that happens), or you could be asked

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CORPORATE FINANCE

will have some nice perks that can make the many long nights slightly more bearable such as free food and complementary taxis home in addition to the standard perks of free or heavily subsidised gym memberships, dry cleaning services and free tickets to concerts and sporting events. You’ll work very long hours and might not get much of the glory, but you will be an integral part of your team.

have to work weekends regularly at first, then possibly around 10 hours on weekends once you’ve had a few years as an associate. Here you don’t necessarily have to be a maths wiz to shine, but as long as you possess general business knowledge, business sense and an overall grasp of the markets and your clients, you can really stand out as an associate. Vice Presidents As you may have guessed, VPs are on the next rung of the ladder. They oversee the analysts and associates and while they still keep an eye on the modelling, meet with the analyst and associates to go over work and make any changes to models or presentation, they really don’t do any themselves. They do, however, oversee the pitches because one of the main responsibilities of the VPs is client management. These are the people who spend time with most of the clients and so will be in lots of meetings and disappear for many working lunches and dinners. VPs get paid more, have more responsibility, but also travel a lot visiting clients, so they are sometimes barely in the office. They regularly are called out to client sites on a moment’s notice so planning a work week or even a weekend at home can be difficult and nearly impossible. They are also probably the ones who represent the company at various conferences and industry gatherings, trying to gain new business and network. Yes, the grunt work is over by this point and you’re probably getting paid quite a bit, but you may not have much time to spend your money or see your family as often as you’d like. Directors/Managing Directors This is where all that financial modelling pays off! MDs sit at the top of the corporate finance food chain so they pretty much get to do what they want. They are in the office only when they want to be and only visit the clients that they want to – usually the most important clients are the ones the directors handle themselves. The directors’ real job is to represent the team, make sure the clients are happy and drum up as much new business as they can.

“As long as you possess general business knowledge, business sense and an overall grasp of the markets and your clients, you can really stand out as an associate.”
Associates Associates are higher up in the pecking order than analysts, but sometimes not by much. They might handle the more complicated models, but they generally oversee and hand out work to the analysts as well as concern themselves with the pitches to the clients for whatever deals the team thinks are best. This takes the form of pitchbooks and generally associates work with analysts to create these. The pitchbooks are used to gain new clients and usually for each potential client, the associates and analysts create two: a general pitchbook outlining the bank and what the corporate finance division has accomplished, and then a more specific one that contains particular models aimed at exactly what this client wants to achieve. So though associates still have to do a bit of the grunt work of the analysts, they do also get face time with clients, which can be a nice change. This also means that while you need to be technical, you also need good soft skills and need to be able to meet and socialise with clients. An associate with an MBA might have a better work life than one without, as this can mean more experience and thus more responsibility and more leeway from the bosses. Expect long hours again, though not as long as when you were an analyst. This is simply a reality of working in corporate finance – your regular leaving time might be around midnight and you’ll probably

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My 24 hours in corporate finance – an ipo
Though the deals within corporate finance can take on many different forms, a regular one is an IPO. IPO stands for Initial Public Offering (if you hear a company is “floating” or considering a “flotation” or an “offering”, they are considering an IPO) and this is when a company decides to issue stock, primarily to raise funds. The corporate finance team in an investment bank comes in by arranging the deal and taking some of the risk. You may have heard of the term underwriting - this is what the investment bank does in an IPO, they advise the company releasing their shares and then they take on some of the risk involved in actually being able to sell those securities. IPOs can make up a large amount of what corporate finance teams do so it’s important to know exactly what goes into one and what the timeline of a deal looks like. Hear it through the grapevine When a company wants to issue shares – because they may want to raise money without borrowing - many times the information leaks out and then different investment banks rush to pitch their services to that company. This is where the relationships that the directors and VPs cultivate come in. If they have a great network of people they know in the business, they are more likely to be the first to know that a company is thinking about an IPO. The directors get paid the giant sums to basically keep up on what everyone in the industry is doing and to keep relationships going. It may seem like all they ever do is go out to dinner with clients and potential clients, but this will be how the bank finds out about upcoming deals and how companies will think of your bank first when they want to do a deal. General pitching Once a higher up in the corporate finance team hears that a company might be considering an IPO, they will go back to their analysts and associates and have them put together a pitchbook. The first pitchbook usually assembled is a general one that outlines key points about the bank and highlights any successes that the corporate finance team have had. Obviously this is the “pitch” to the company to use this bank as their IPO manager. Then the higher-ups will try to schedule at least a few follow-up meetings in the hopes that they are one of the investment banks hired to manage the deal. And usually there is more than one bank working on one public offering so being on good terms with corporate finance teams from other banks is important too. One bank will usually take the lead on an IPO (the manager), but there may be another or even two other banks in charge of specific areas of the deal. Second pitchbook with more detail Then after some initial contact, the corporate finance team will produce their second pitchbook. This pitchbook is much more detailed and will use financial modelling to get the data needed. This is a lot of work, much more so than the first pitchbook – you might want to bring a pillow and a toothbrush to work cause you’ll probably be spending a night or two in the office. A reason the second pitchbook may be very complicated is if this specific company has never previously issued stock and therefore there is no data to present! If there is no history of what will happen, how much money they will be able to raise, etc. the analysts and associates must do a lot of comparable analysis, and that takes time. These pitchbooks will probably have the following information: general information about the bank and its achievements, similar deals that

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CORPORATE FINANCE

the bank has done to highlight their expertise in the area, the projected value of the company based on other companies in the same industry that have issued shares and highlighting the bank’s place in a “league table” of other underwriters.

“MDs and VPs from several banks are parading in and out of their offices, this is generally referred to as the “beauty contest”.”
The actual pitch It’s probably annoying for the analyst and associates that work so hard on the pitchbooks (the VPs and MDs also work on them, but not as much as the analyst and associates do) that they don’t get to make the actual pitch, but that’s how it goes! An MD and a VP and maybe a stock analyst, who will deal with the shares once they are issued, will be the ones to give the presentation to the company to try to persuade them to use their bank as an underwriter. Because at this point in the deal, MDs and VPs from several banks are parading in and out of their offices, this is generally referred to as the “beauty contest”. You’ve won! Now the real work starts Once your team has been named as the manager of the IPO, next you have to get together with the other participants who will be helping out with the deal. This list usually includes: the main players of the company itself like the CEO, CFO and any important department heads; the accountants for the company; the company’s lawyers; the lead manager; any co-managers and lawyers or council for the underwriters. Then the due diligence begins. Before the stock is issued, there needs to be a lot of research undertaken to make sure the timeline and the price the stock is issued at is correct so as to make the deal a success. The first step in this research is to speak at length with the management of the company as well as to get to know that company and the industry inside and out. This could mean

researching other similar companies or making site visits to the company’s different plants, offices or factories. The idea is to get a sense of output, growth, health and general direction so that the performance of the company in the short term, as well as long term, can be assessed. Drafting The prospectus is the basic marketing tool used to get people to invest, or buy the stock that will be issued. The prospectus is put together, or drafted, after the due diligence is finished and is the most labour intensive step after the second pitchbook. The first draft of the prospectus is written by the issuing company’s lawyers, then gets passed around from team to team as different drafts of the document are made. The more teams that are involved in the deal, the longer the drafting stage as everyone has different ideas about the tone, the style, what should be included and what should be left out. There are mega drafting sessions where the various teams meet to discuss the prospectus and those meetings can even involve some analysts and associates on occasion. Usually this stage takes up to 10 weeks and most times ends up at an all night financial printing company to get it completed on time. And this isn’t just a case of agreeing on the words and then hitting “print”. Usually for an IPO you might need as many as 20,000 copies of the

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preliminary prospectus (called the red herring, or red for short) and 10,000 copies of the final version! These financial printers are set up so that the teams that oversee the final draft of the prospectuses can work uninterrupted for two days in a row if needed. They get food delivered to them whenever they want and there are even showers on site – great for not smelling, bad for taking away excuses to leave. Getting the word out At this point the prospectus is finalised, printed and has been sent to as many potential investors as the team can think of. Now you need to follow up to get the greatest number of investors on board as possible. Both the VP and MD of the lead manager and the management of the issuing company will come up with a presentation to show to as many potential investors as they can. Other marketing materials are constructed by analysts and associates such as “selling memos” and other documents that salespeople will use to entice their clients into investing. This part of the whole process is sometimes called the “road show” because the company’s management, along with the representatives from the managing corporate finance team, will sometimes make hundreds of presentations in

loads of different cities. It can basically mean weeks of hotel rooms and airplanes. And at a road show, the associate’s role unfortunately amounts to little more than babysitting and making sure everyone has their luggage and hasn’t left their passport at home. Is the price is right? Part of putting the prospectuses together means pricing the stock that will be offered. Usually a range will be set by the underwriting team while doing the due diligence. Hopefully the team have got it right and the stock ends up trading at the high end of the range. The best case scenario is a stock that trades above the top of the range and that happens when there is a lot of buzz behind the stock and it becomes a very sought-after investment. Conversely, if no one cares about your new stock then it may trade below your predictions, which is not good. Then when the stock is issued it’s up to everyone to watch how it performs, some may go up slightly while others may look healthy on the day the stock is issued and then drop on day two. Hopefully the due diligence and marketing phases have worked together to create a good product that is well publicised.

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SALES AND TRADING

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WHAT are equities?
The equities desk in an investment bank deals with company stock (called shares in Europe). Depending on where you are, you will have to follow the various indices around the world such as the FTSE, NASDAQ, Dow, CAC and the DAX. Not only will you have to pay attention to the numbers – which stocks have gone down and which are up – but you will have to learn about how companies are valued. You’ll have to form opinions on how companies become overvalued and undervalued, good investment strategies for those looking to invest in stocks and how certain social and political events can affect companies’ share price. What is a stock market? A stock market is an auction where stocks are traded; stocks are traded on a stock exchange. Traditionally the stock exchange is an actual location where people, banks and hedge funds call in their orders and then the order is placed. Examples of stock exchanges are: the New York Stock Exchange, the Frankfurt Stock Exchange and the London Stock Exchange. Nowadays there are also virtual stock exchanges where everything is done over computers. The NASDAQ is an example of a virtual stock exchange. The NASDAQ This stands for National Association of Securities Dealers Automated Quotations and though it is US-based, is completely virtual and electronic. Started in 1971, it came out of over-the-counter trading model, which means there is no physical exchange to go through, all orders are processed by computers and can be completed from anywhere. Besides being ahead of its time by using computer systems to buy and sell stocks, it was also the first exchange where people could go online to trade stocks. The London Stock Exchange This exchange has been in existence since 1801 but buying shares stared as early as the 1680. This came out of the need to raise money for two maritime trading voyages, one to China and one to India. It is thought that by 1695 there were 140 companies whose shares were being sold and traded. The motto on the coat of arms of the exchange translates to: “My word is my bond”.

“You’ll have to form opinions on how companies become overvalued and undervalued and how certain social and political events can affect companies’ share price.”
What is an index? The indices listed below are a way to keep track of various stocks and whether their stock price is moving up or down. An index will only track a certain part of a stock exchange. For example, the FTSE 100 only tracks 100 companies but it is considered a great indicator at the overall health of the British economy. The FTSE 100 First you’ll have to know how to pronounce it (footsie) then you’ll need to know that it stands for the Financial Times Stock Exchange 100. It was started in 1984 jointly by the newspaper and the London Stock Exchange (which has now turned into the FTSE Group, which is an independent company all together) to list blue chip (or large cap) companies appearing on the exchange. So many instruments are based on the FTSE and it is broadly regarded as a way to determine the health of the UK economy.

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The S&P 500 This is an index of 500 blue chip companies in the US. Blue chip companies are large companies that are thought to be stable, well-run and profitable. They are called blue chips because in poker the blue chips are the most valuable. Like the FTSE 100 in the UK, the S&P 500 is a good gauge of the US economy. All of the companies on this index are public and also trade on the New York Stock Exchange and the NASDAQ. Since 1957 the index has been published by Standard & Poor’s, which actually publish many different indices. The CAC The CAC 40 is a French stock index of the 40 French companies on the Euronext Paris Exchange (formerly the Paris Bourse) with the highest market capitalisation. Market capitalisation, or market cap, is when you determine how much an entire company is worth based on its share price. So if the share price is x, you multiply that by all of the shares that have been bought by shareholders, in theory giving you the value of the entire company. The CAC 40 includes companies such as L’Oreal, BNP Paribas and AXA but market cap is calculated regularly and companies may drop out of the CAC 40 if their market cap falls. Though the companies are French, many of the stockholders are international and come from Britain, Japan, Germany and the US. Because many of those companies listed are multinational, the CAC 40 has a very international feel and affects other international markets too.

The Nikkei This is a price-weighted index from Japan. A price weighted index means that the percentage of the index made up of a particular stock depends on the stock price. So the higher the stock value, the larger the portion of the index it will make up. This is different from a market-weighted index where the equity market value (value of the share times number of shares outstanding – shares that are out in the market and have been purchased) determines how big a percentage the company gets. The Nikkei was started in 1950 by the Nihon Keizai Shimbun newspaper and is reviewed yearly. What makes stocks move? Many changes in a country’s economic situation, to a specific company announcing that their CEO is stepping down (Google Steve Jobs and Apple), can affect stock price. Perhaps the biggest trigger for a stock moving is interest rates. The consumer price index tracks the price of everyday goods and if those prices rise, people fear inflation. When there is inflation it means that money is not as valuable anymore because it takes more of it to buy things than before. That also means that interest rates rise to compensate. All of this means investors look to more low-risk moves, such as bonds, as opposed to trading stock. People also constantly look at the GDP of a country to get an idea of the overall economic health. If GDP slows down then a recession may not be far behind. In a recession everything slows down

“The FTSE 100 – First you’ll have to know how to pronounce it!”
The DAX The Dax, or the Deutscher Aktien IndeX, has been around since 1988 and lists the 30 biggest companies trading on the Frankfurt Stock Exchange. Each quarter they review the list of companies named on the index and make any appropriate changes so the largest companies are always represented on the index. Again, this is a great general benchmark for the German economy.

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and demand for companies’ products suffer. The companies’ profits will shrink and that will cause their stock price to plummet. If you’re tracking an individual company you need to pay attention to the earning per share (EPS). BOX Companies release this figure quarterly and it not only tells you about the health of a company, but whether its stock is overvalued or undervalued. If analysts have predicted a company’s EPS at one price, but the actual price is lower, the price of that stock will fall as people look to sell of a stock that is in worse health than they thought. If the opposite happens and the EPS comes in higher than expected, that stock will rally. How stocks are measured and valued You can’t just go on the price you see on your screen. People have developed hundreds of different ratios to value stocks and compare them. These are the most valuable ones you need to know if you want to work in equities: P/E ratio This stands for Price to Earnings and simply is the price of the share divided by the Earnings Per Share (EPS). This will tell you the price of the stock related to the earnings of the company. So if a stock has a high P/E ratio that means it’s expensive as you are

paying more for those earnings per share. If two companies have the same EPS but one has a higher P/E ratio, that one is a more expensive of the two and means you are paying more for the same EPS. Often the P/E ratio as expressed by saying that a company is trading at 20 times its earnings if it has a P/E ratio of 20. PEG ratio This stands for Price/Earnings to Growth ratio and takes the P/E ratio and then accounts for how fast the EPS for the company will grow. A stock that is growing rapidly will have a higher PEG ratio. A stock that is well priced will have the same P/E ratio and PEG ratio. So if a company’s P/E ratio is 20 and its PEG ratio is also 20 some might argue that the stock is too expensive if another company with the same EPS has a lower P/E ratio, but that also means that it’s growing faster because the PEG rate is 20. EPS, or Earnings Per Share, will tell you how much each share of a company will earn. It’s probably the most important thing to look at when deciding to invest in a company. The most basic formula to calculate EPS is profit divided by a weighted number of outstanding shares. It’s important to use a weighted number as the actual number of shares bought can change often.

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24 hours in equities
J.P. Morgan, Equity Research Analyst
I work in the European Equity Research team here at J.P. Morgan, which is divided up by industry. I work in the Property team, with whom I did my summer internship whilst at university. Our job involves analysing the companies we cover, publishing reports and advising clients. We look at all aspects of the industry and all types of property, including house prices, shopping centres, offices and residential, as well as transactions made by the big property companies. I usually get in between 6.30 and 7.00am, depending on how busy we are. The first couple of hours are spent looking at the newsflow and putting together our ‘Daily’ research report, which is sent out to clients at around 9.00am. This includes updates on what happened in the market the day before, any newsflow from the industry such as acquisitions or disposals (buying or selling properties or property developments) made by one of our stocks, as well as transactions or deals across the wider sector. My team covers around 45 European Real Estate stocks, which also all regularly report earnings results. We include results commentary in our Daily, such as whether results are in line, above or below expectations. Around 9.00am we get breakfast. Then the rest of the day is very varied – if one of our companies has reported results then we’ll spend the day updating the models, sending out alerts, going to meetings, speaking to salespeople and traders as well as calling clients. Clients will sometimes talk to one of our salespeople first if they have questions on a stock, but if they have more specific questions about the company, then they talk to analysts like us. We also publish a huge, 400-page annual report in September – the Property Handbook. This gives a more fundamental analysis of the property market, as well as highlighting our “top picks” for the year. These are the stocks we would advise our clients to invest in. For each of the stocks we cover, we give either a buy, hold or sell recommendation, which clients look at when deciding whether or not to invest. We upgrade/downgrade stocks periodically depending on where we think the share price is going to go. When speaking to clients, we always explain the reasons for our recommendation, which are a combination of many different factors. We also regularly attend property tours and site visits of our companies’ assets and new developments. For instance, one of the companies we cover recently acquired The Trafford Centre in Manchester, and organised a trip for analysts and investors to see the shopping centre. Usually I go home around 6.00 or 7.00pm. Occasionally though, when we’re working on a big sector report it can be later. Generally, I would say that my days are very varied - it is hard work but we have a lot of fun too.

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WHAT IS FIXED INCOME?
Fixed income is an instrument that you as an investment banker can use to make a profit for you and your clients. The name fixed income explains exactly what it is: debt securities that pay an amount of income at fixed intervals over a certain length of time. There are many different kinds of fixed income deals you could make and each work in a different way. Here are the basic fixed income products that make up the desk. Bonds This is the biggie in the fixed income market. The most basic definition of a bond is a kind of loan. If a company issues bonds and you buy one, you are basically loaning them money. In exchange, they will pay you interest on a fixed schedule for the length of the loan, or bond. When the bond expires, the company will also pay back the original amount of the bond, or the principal. Bonds are great for people who feel comfortable investing in something that they know will pay them quarterly, annually, or whenever is stipulated. Bonds are issued by lots of different places; here are the ones you need to know about: • Government: Government issued bonds are considered one of the most stable investments you can make. Actually, there are three kinds of securities to go for: Treasury bills (or T-bills), which mature for up to two years; Treasury notes, that go on from three to 10 years; and Treasury bonds, which last from 10-30 years. Of course these are seen as stable because really, is the government going to default? Well, in theory, no, but stranger things have happened. If you keep a close eye on the Eurozone economies you may not be so sure. But the amounts of the payments are affected by interest rates, so they’re not totally without risk. • Municipal: These are regularly called “munis”. They are bonds that are issued by the local government or a city. Munis are also considered quite a safe investment, as cities rarely default (but again, never say never...). You will mostly hear talk of munis in relation to the US but a UK muni market does exist and there are also operating muni markets in Sweden and the Netherlands. • Corporate: These are issued by a company just like they would issue stock (but don’t get confused – a stock is a share in the company and a bond is a debt security). Issuing bonds is a great way for a company to raise money if they are looking to expand or for things like new offices. Another important aspect of the bond market is the ratings. Standard & Poor’s, Moody’s, and Fitch Ratings are the credit rating agencies you need to familiarise yourself with. Bonds are rated on a scale from AAA (the best ones, most likely to meet payments) to D (a greater chance of default which means you’ll lose your money). The agencies label their levels slightly differently, but in general the bonds that have a rating of at least BBB are most likely complete payments. Anything with a rating lower than that is considered a high-yield bond, more commonly is known as a junk bond (also called “high-yield” or “speculative” bonds when you want to be a little more tactful about it). Well, the name alone should tell you all about those! Yes, they can be high yield, but they are so risky that there is a big chance the issuer will default and that that means you don’t get your money.

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Derivatives Derivatives are tricky. We’re used to seeing something, it’s got a price tag, and that’s how much it’s worth. But a derivative’s value changes based on a host of different factors. Here are the basic ones to learn: • Forward: A forward contract means that someone agrees to buy something from someone else at a future date for a fixed price – got that? So say that you want to buy a car, but you don’t want to buy it for another year. The car dealership agrees to sell you the car you want in exactly one year for £20,000. Well, in a year’s time the value of the car could go up or down, depending on a lot of things. So if the value goes up, the dealership still has to sell you the car for £20,000 and that means that you have made a profit, while they have lost money. • Option: Instead of a forward, you can buy an option. So, if in a year’s time the value of the car is only £18,000, but you still have that forward saying you have to pay £20,000, the option gives you the option to opt out of the deal. That £20,000 is also called the strike price, or the price that the contract will be carried out for, if the deal happens.

Imagine your local bookseller, instead of requiring you to pay £10 for the book in four weeks’ time, says to you, “If you come to me in four weeks I’ll sell you the book at £10 but you are not obliged to buy the book from me” (Your local bookseller is, of course, unlikely to give you this option for free. If anybody offers you a free option you should generally take it…). In this case you would buy the book from the bookseller in four weeks’ time only if the price for the book at all other booksellers were greater than £10. In other words you would exercise your option only if it were valuable for you to do so. But even prior to exercise, your option has a value. That value is made of two components: inherent value (the amount by which the market price of the book at that time exceeds the £10 price tag you and the bookseller have agreed) and time value.

“Investment banking isn’t just “buy low, sell high”.”
• Interest Rate Swap: If you find the finance world interesting, you’ll love the idea behind interest rate swaps. Basically, this allows you to swap one cash flow for another. There are a lot of reasons for someone to do this, but let’s say that there’s a company that pays interest on a loan and that interest is floating, meaning that it changes. If

the directors of that company decide they don’t like being exposed that way, they can swap their payments with another company whose interest rate payments are fixed. So Company A pays Company B their floating rate and Company B pays Company A their fixed rate. Swaps can be structured in a number of ways, but this is the most basic. Coming back to fixed income, this is another way that a particular party can ensure that they are getting a payment at a fixed interval. So as you can see, investment banking isn’t just “buy low, sell high”. Fixed income is a useful market to understand, and an essential tool in the investment banking world.

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WHAT IS FOREIGN EXCHANGE?
FX, or forex, stands for foreign exchange. Every bank has an FX desk but it’s more important to some banks than others. Forex trades are all over-thecounter – this means that there is no centralised body or place where things are regulated and traded. The trades take place directly between two parties with no exchange house in the middle. Every country has its own central bank where currency is controlled, but there is not one global body that oversees the currency market. FX is also interesting since anyone can get involved – from someone day trading from home for fun, to global institutions making a deal ahead of an international purchase, to hedge funds speculating in more than one currency, the forex markets are open to everyone. it easier for countries to deal with any ups and downs the currency may face. The UK, US and the Eurozone all have floating exchange rates. FX desks have a separate group for Emerging Markets FX. These are currencies from countries that are experiencing tremendous growth. They were formerly known as less developed or Third World countries but now those terms are now outdated. These countries, such as China, Brazil, South Africa and India, are seen as having tremendous upside and potential for investment, but at the same time carrying a lot of risk. Many large, multi-national corporations that are not necessarily in the finance sector may actually have their own trading division to help with their international business. For example, a large construction firm may employ their own forex traders so that they can handle converting one currency into another when there is a piece of equipment they need to purchase overseas. So FX can actually reach into many different kinds of business and knowing how to trade currencies doesn’t necessarily mean that you’ll only be able to find work at a bank or fund. But besides those kinds of situations, the main hubs for FX markets are: London, New York, Singapore, Hong Kong and Tokyo. At one bank there will be FX traders spread out all over the world so that all time zones are covered and the desk can take advantage of moves that may happen when only one market is open. This is a true 24-hour business, and trading can take place any time of the day or night (only on weekdays; you’ll be happy to hear that markets are closed during weekends). Different kinds of FX trades There are different ways of trading foreign exchange and the most common are the following: Spot – This is the shortest kind of trade that

“Knowing how to trade currencies doesn’t necessarily mean that you’ll only be able to find work at a bank or fund.”
Some countries decide that they want more control over the value of their currency and so they have what is called pegged or fixed exchange rates. Such countries include: Venezuela, the Bahamas and the city-state of Hong Kong. Their central bank ensures that their currency is directly correlated to something else, whether that is gold or another major currency. It is helpful for controlling inflation and also used by smaller countries to ease trade, since their currency is directly related to a major world currency or instrument. Most countries, though, have a floating exchange rate, and that rate is dictated by the markets. Some economists think this way is more helpful as it allows currencies to work themselves out in the markets and makes

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usually is settled in two days. It’s the most simple kind of trade as you literally trade x for y and that’s it. Forward We’ve covered forwards in the chapter on fixed income, but this can play a part in the FX market too. An exchange rate is agreed but the deal doesn’t actually take place until a pre-determined date in the future. Future Again, part of fixed income but also can be used in trading foreign exchange. It’s like a forward but more standardised and regulated.

codes there will be a number, for example 5. If you saw GBP/USD 5 that means that 5 USD = 1GBP (we just used nice round numbers for this example, it’s not actually the current rate. If it were, we’d hope that all you Brits would be too busy living the good life somewhere in America to be reading this!). In these quotations it’s always “how many of the counter currency make up one of the base currency.” What affects exchange rates? The first thing that can make the value of a currency rise and fall is something to do with that country’s political system. This can mean anything from elections, to some kind of scandal involving government officials to a new president/ prime minister/ruling party. Any new party that is expected to radically change policies or throw the country into any kind of instability will have a negative effect on the country’s currency and it will weaken. This will also be the case should there be questions about who will actually lead the country or who is in charge. The state of a country’s economy will also affect the strength of that country’s currency. Any time a report comes out about a country’s GDP, budget deficit or surplus, or a change in economic policy, you will see the currency of that country move. Of course the nature of the announcement will determine which way the currency goes, but any change or announcement having to do with the fiscal state of a country will affect its currency. Traders themselves can also influence forex markets. If enough traders perceive one currency to be on the decline, they might pull their investment in that and invest in another currency that they think is more stable. That will make the demand for that second currency higher, but the first one will suffer, all because of perception. This is what’s called market psychology and is a very interesting component of the FX markets – trying to figure out what people will do when an event occurs. Successfully predicting this is an important skill possessed by outstanding traders.

“You’ll be happy to hear that markets are closed during weekends.”
Option This is another fixed income instrument used in FX where you put a trade in place but then have the option to back out of it before the date where the trade would be done. You have the right, but not the obligation to go ahead with the trade until the contract expires. Swap An FX swap is when a trade is done but then reversed later. So you buy x, sell y and then in three months you sell x back for y. A swap is usually achieved by making a spot trade and also a forward at the same time. How to quote an exchange rate Every currency in the world has a three letter code. For the euro it is EUR, the code for the pound is GBP, the US dollar is USD. To quote an exchange rate between two currencies, one code will be listed directly after the other, usually as: GBP/USD. In this example we’d call GBP the base currency and USD the counter currency. After the two currency

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my 24 hours in foreign exchange
A typical day goes from 7am to 7pm and sometimes days can last longer than that, depending on what’s going on. A former FX salesperson described their typical day as consisting of the following tasks: The first thing I do when I get in to work is read summaries of what happened overnight and after I left the office the day before. These come from news outlets and other colleagues in the business, either from my bank or others. Then I take the most important points from everything I’ve read and write my own summary of what’s going on and what I think will be important for the day(s) ahead. The distribution list for my morning summaries is long as I make sure that everyone knows what I’m thinking in case they want to do a trade. After my summary I get on the phone, which is a very important part of being a salesperson. Some of my customers always want to be called in the morning to discuss what has happened overnight and my general thoughts, others might call or email me to discuss anything they’ve found interesting in my morning update. Talking to traders is another important part of my day. Since they execute orders from me and my clients it’s important to know what they see/ what they are thinking and always have a good relationship with them. Sometimes traders and salespeople can have their differences but not always; one of my best friends is a trader.

“Bloomberg News is on constantly so that we can see what’s going on minuteto-minute.”
Again, I do another round of calls with customers, especially if something important has happened since I’ve been in the office. Sometimes they call me and ask me to look at specific things and may ask my opinion on some issue and then ask me to come up with trades for that. This is where my creativity comes in and what makes a salesperson truly good at their job. The trick is to come up with trades no one has thought of yet so that your customers know that they are getting value out of your relationship and not just the same old ideas they could get anywhere. At this point in the day I usually end up doing trades so I will be communicating with clients as well as with the trading desk. By this time the US market is open and it’s not unusual for something important to have happened. In that case I’ll call the appropriate customers again to discuss and hopefully do a few more trades. Hopefully it’s a little quiet by this time so I take that chance to think about what has happened that day and try to predict what is going to

“You’ll soon realise that talking to customers is really the number one duty of a salesperson.”
Then I make sure to keep reading news headlines. Bloomberg News is on constantly so that we can see what’s going on minute-to-minute. The markets move fast so you can never ignore the news for too long.

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Actually executing a trade can happen in a number of ways. You can do a deal over the phone, or probably more likely you’ll do it electronically. If you’re looking to get into finance, familiarise yourself with Bloomberg. Before Michael Bloomberg became mayor of New York City, he created a company that not only specialises in market information, but also an important trading platform. Everyone on the trading desk (and in sales for that matter) has a Bloomberg terminal, where they can chat to other traders and salespeople, see market numbers and execute trades. Many people execute trades over Bloomberg chat (which is just like IM). Some will do deals over the phone and then confirm the details over Bloomberg chat afterwards. There are other trading platforms and e-market platforms too where people can execute a trade. Doing a trade via some kind of electronic platform is getting more and more commonplace, and over the phone deals are becoming a thing of the past.

happen as a result. Again, this is something extra that not every salesperson does but it can really add value for your customers and help you understand the market better. If your predictions are proven right, your credibility will skyrocket but more than that it’s going that extra mile to make sure you’re prepared and if you enjoy the markets you won’t mind doing it.

I always end the day with more calls to customers. As a salesperson you can’t be afraid to pick up the phone and talk markets and you’ll soon realise that talking to customers is really the number one duty of a salesperson.

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What are commodities?
Sometimes investment banking can seem abstract - you have to pay attention to how the “market” reacts to events or you are betting on which way interest rates will go. You’re not trading real things you can touch and hold, and sometimes that can be hard to wrap your brain around. But one section of an investment bank that does away with all that is commodities.

“If you work in commodities you could be selling sugar to Cadbury.”
What is a commodity? Commodities are products or goods with a uniform quality and price across the market. These can range from everyday items such as coffee, cocoa or cotton to other goods that may or may not be part of your daily life such as gold, oil and coal. Generally all commodities are grouped as either hard commodities - ones that are extracted, such as minerals - or soft commodities - ones that are cultivated by man. Commodities trading can be fascinating and can cover a range of products and issues such as agriculture, energy and precious metals. If you work in commodities you could be selling sugar to Cadbury or buying copper on behalf of a manufacturing giant. It may not get the press that the bond market or corporate finance does, but it is just as rewarding and challenging. How are commodities traded? Commodities are traded on commodities exchanges, so that the goods can be regulated. When a trade is made, there is a contract produced that details the trade. Sometimes a commodities trade can be for spot price, meaning that the buyer agrees to a certain price for the good and the seller will transfer that good to the buyer immediately. More often, though, commodities deals are done as forward or futures contracts. A forward or future is when a contract is written up

“You’re not trading real things you can touch and hold, and sometimes that can be hard to wrap your brain around.”
that states that a good will be sold in the future for an already determined amount of money. So if a company that makes soy milk needs to buy soya beans to make their product, the soya bean farmer may say that his crop will not be ready for another five months, but they will enter into a futures contract where they agree the amount that the soy milk company will pay the farmer and they pay it now. The company likes this because if the price of soya beans rises in those five months, they won’t have to pay anything extra as they’ve already locked in the price. The

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SALES AND TRADING – COMMODITIES

farmer also benefits from a futures contract because if the price of soya beans goes down, he won’t suffer a hit as he has already negotiated his price.

“If there is a major drought in the American mid-west, how will that affect corn prices?”
What’s the difference between a future and forward? Though a future and forward is basically the same thing, they cannot be used interchangeably. A future is more regulated than a forward. Futures contracts go through the exchange so they are very strict and there is no way either party can get out of or default on the contract. A forward is less formal and more of a personal agreement between the buyer and the seller. Though you don’t have to go through the exchange, which can be beneficial, you also don’t have the exchange to back you if the other side decides they want out of the contract. But it does mean that you can call off the trade too if it becomes clear that it will no longer be in your interest. Another difference between a future and forward contract is that forwards, because they are less formal, are set up so that the entire

order is settled at the agreed upon forward date. But futures contracts can actually be settled over more than one date and also at daily marked-tomarket rates. This means that the fair value of the commodity is calculated at the end of each day, no matter what rates the commodity was trading at throughout the day. Options Options are also a popular contract in commodities. This is a contract similar to a future except that each side has to option not to go ahead with the contract. Every option has an expiration date so if neither side wants to enter into the option before that date, the contract ends. Analysts often work on complex models to try to predict how values will move and if an option will be profitable or not as trying to determine volatility is an important part of commodities trading. Commodities trades don’t work in a bubble and you’ll have to pay attention not only to the product you are trading but also things like weather (if there is a major drought in the American mid-west, how will that affect corn prices?), the environment/advances in alternate energies and how many worldwide products include things like copper. You’ll also need to think practically - if you buy a large amount of oil, where are you going to store it? - which can make for a very interesting career.

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what you also need to know

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Buy-side vs. Sell-side: what are they, what the heck is a hedge fund and which role is right for you?
The world of investment banking is full of jargon, unique words, and exclusive phrases, and you HAVE to become fluent in this special language if this is a world you’re looking to inhabit. Two of these essential I-banking phrases you need to know, whether you’re aiming for the front office, middle office or back office, are “buy-side” and “sell-side” and the difference between the two. The buy-side The buy-side is made up of the clients of the investment bank, which covers lots of different types of companies, organisations, and everything in between. They could be individuals, private companies, pension funds, asset management funds, proprietary trading desks (prop desks,) hedge funds or mutual funds. They are the ones buying the securities, hoping for high returns on their investments, and that’s why they are called the buyside. The variety of the buy-side Since so many different kinds of companies come under the umbrella that is the buyside, let’s take a closer look at a few and identify how they’re different from each other. • Investment/asset management firms : These firms manage a portfolio of stocks, bonds, real estate – anything – for the investor. Again, an asset management firm can have a variety of clients, ranging from pension funds to companies to individuals. An investment manager (sometimes called a fund manager) devises an investment strategy for the client and keeps them updated regularly with reports and analysis. Investment management funds are part of the buy-side because they buy the different products from investment banks to maximise their portfolios. Generally these kinds of firms deal with longer-term investments. • Asset management divisions of investment banks: Investment banks also have their own asset management divisions. This is usually where government entities and multinational corporations turn to manage their investments and various portfolios. • Hedge funds Hedge funds follow the same basic idea – investing clients’ money, hoping to increase that investment – but are a slightly different beast. Hedge funds are more specialised as some are set up to only arbitrage, some focus on the general macro-economic situations of

WHAT YOU ALSO NEED TO KNOW

“You HAVE to become fluent in this special language if this is a world you’re looking to inhabit.”
The sell-side The sell-side is the investment bank itself. The investment bank is the one selling the securities and investment ideas, so it’s easy to remember that they are the sell-side. People on the sell-side direct their clients to securities which they think are in the clients’ best interest, and which can generate a profit for themselves too.

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the world and they can vary greatly in size. Hedge funds also take large fees up front from investors and sometimes even more so than other buy-side institutions. To put it bluntly, only the very rich are allowed to invest in hedge funds because the initial required investment is usually ridiculously high. Hedge funds can also short – sell a borrowed asset, are also less regulated than other investment management firms and they also tend to perform leveraged investments where, say a hedge fund buys 1 billion usd worth of stock only using 100mm usd of actual money, the remainder being provided by bank loans – something other types of funds are not allowed to do. If a deal like that is successful, the hedge fund can actually make more that their initial investment, an asset management fund cannot.

investment strategies. It can mean analysing something as broad as fixed income or something as specific as the Argentine real estate market. • Portfolio Managers:  Sometimes also called fund managers, these are the people who actually invest the clients’ money and make the decisions on what will be bought on their behalf. They can encompass the actual traders on the desk or the people who simply come up with the strategies. They also do a bit of client account management, making sure the clients are kept up-to-date on their portfolios. • Investor Relations: The IR department does any PR for the firm, seeks out potential new investors, and keeps current investors in the know about what you’re doing with their money. It can be a varied role, with tasks ranging from event organisation to report preparation to damage control (hopefully not on a regular basis!). • Operations: These are the unsung heroes of the firm. They are the technical people who are good with numbers and can spot that mistake in the trade order that no one else did. Operations, or back office roles, can range from IT positions to risk analysts to the people who make sure the trades are settled correctly and on time. Who’s who on the sell-side? On the sell-side, you have similar jobs as the buyside, but the roles are much more uniform from bank to bank. Investment banks also have very structured training programs (some taking place abroad, which is pretty cool as they will pay for you to do your training someplace like Hong Kong) that last for a few months where you try out different roles and see which one fits you best. • Research: Again, you would be tasked with researching a specific sector, product, or location and would be expected to know everything about that topic and supply reports to more senior analysts with recommendations. Many

“Investment banks also have very structured training programs (some taking place abroad, which is pretty cool as they will pay for you to do your training someplace like Hong Kong).”
What are the specific roles that make up the buy-side? Since the buy-side organisations are usually less structured than investment banks on the sell-side, these roles can vary greatly and a role at one firm or hedge fund can be totally different from the role with the exact same title at the investment management division of a bank. But generally, buy-side funds are made up of: • Analysts: This is how a lot of people start off in the investment management world. Analysts will usually be given a sector, region, or even a specific company to research, gather information on, and run investment models about. As an analyst, you will be expected to know literally everything about that topic and will be called upon to recommend

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WHAT YOU ALSO NEED TO KNOW

people start out as analysts and move up after they have a few years under their belt. • Trading: During the training program, it will become clear who will make a good trader and who will not. If you’re good with numbers and can manage risk well, then you may start out as a junior on the trading desk, moving up depending on how much money you make. There are traders in all departments of an investment bank trading foreign exchange, gold, or bonds, just to name a few. • Sales: You also have to be good with numbers to be a successful salesperson, but you really have to be a people person with great problem solving skills. As a salesperson it’s your responsibility to sell unique products to your clients that will make them money and also suggest exciting, creative trades with lots of upside that no one else has thought of yet – not a role for the shrinking violet! Targets for sell-side salespeople can sometimes be very stressful, but generally the bank won’t fix you an unattainable target. • Other: There is a lot that investment banks do. You could potentially end up helping on transactions such as IPOs and M&A deals. When choosing which investment bank to target for a job, look into the different departments and see if they have a specialty, maybe that is something you find interesting and you know that would be a great bank for you. Buy-side or sell-side – which one is right for you? Since presumably you are reading this because you are considering a finance career, let’s compare both of these in terms of the job. • Structure: Investment banks don’t take deposits, so they use their own capital and that of investors to make a profit. This means that by and large if the trades don’t make money, oops... By contrast hedge funds charge their investors a high fee no matter what. So if you’re a fund manager and

you don’t make you clients money on a single investment, your hedge fund will still make money and you will still get paid, pretty sweet, huh? • Pay: Traditionally, working at a place like a hedge fund will get you a better salary (all those client fees). But now after the economic crisis, the pay scale on the buy-side and sell-side is starting to even out. Of course both sides compensate their employees with good basic salaries and bonuses. Perhaps the main difference in pay is that investment banks will generally pay part of the annual bonus in stock of the bank and investment management firms pay their entire bonuses in cash. Those shares typically don’t vest (become yours) for a few years (for example, they could offer you a certain amount of stock, which defers over three years so each year only a third of that stock becomes yours) so if you’re thinking of leaving your investment banking job before then, you’ll have to find a new company that will buy out your stock as part of your new employment agreement, or you’ll just have to walk away from it; definitely a point to think about if you’re debating whether to join the buy or sell-side. If you’re planning on staying at one particular investment bank for the long haul, this might not matter to you. But if you want flexibility and an easier time if things turn pear-shaped, then this will not help. Traditionally, investment management firms have not done this, but some are starting to consider it too.

“Investment banks will generally pay part of the annual bonus in stock of the bank and investment management firms pay their entire bonuses in cash.”
• Stress: If you don’t already know that stress is an integral part of any finance job, then you have a lot to learn about the sector. Working in any type of financial organisation means that you will be stressed out. Even if you work at an asset management firm, though you will have those client fees to fall back

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on, if you don’t make the clients money they will not be pleased and could redeem, a.k.a. pull their money out of your fund, and that is bad. If you decide you want to become a trader at an investment bank, colleagues will have access to your books to see whether you’ve been smart with your trades, or lost heaps of cash. Salespeople at investment banks have targets they have to hit and those can be brutal measures of worth to the bank. • Hours: Hours can be insane on both sides, but this depends greatly on where you’re working. Traditionally, employees at investment banks have longer hours and they can be LONG. If you have to trade with a country on the other side of the world you’re getting into the office at a ridiculous hour, waking up in the middle of the night to trade, or having a fun little sleepover at your desk. Depending on which markets you’re working in, you have to be in the office when everything kicks off and those times can vary. Because this is now a truly global world, there is a market open somewhere at all hours so the possibility of working round the clock is real. Working at a place like a hedge fund can mean more normal working

hours, but it doesn’t exempt you from early starts, long days, and trades and decisions from home. • Career advancement: This depends greatly on your institution. Normally, it has been easier for people to advance at smaller funds than at large investment banks. At a smaller fund it may also be easier to move into another department, if you find you’d like to take your career into a slightly different direction. But that doesn’t mean that there’s nowhere to go at an investment bank. If you get an interview on either the buy-side or the sell-side, make sure you enquire about this, as it really depends from place to place. Only you can tell whether investment banking or investment management is right for you. Don’t believe every stereotype you hear about the buyside or the sell-side, as there are so many different kinds of institutions, really everything is a variable. As long as you go with the job that suits you best, there are no wrong choices.

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Investment Banking vs. Investment Management: what’s the difference and which one is right for you?
So you know you want to work in finance, but where? The sooner you know how all of the different places in the investment world link up, the quicker you’ll be able to picture which kind of job will suit you best. Here we’ll look at investment banking (the sell-side) and investment management (the buy-side), how they’re different, and how they work together to achieve their goals. Investment banks are institutions that raise capital on behalf of their clients. They can make this money by doing anything from foreign exchange trades, where those exchange rates make them a profit, to interest rate swaps to purchasing stocks and bonds, or helping to facilitate M&A deals. Clients of investment banks can be wealthy individuals, companies, pension funds, corporations, mutual funds, governments, proprietary desks (prop desks), or hedge funds. Investment banks are called the “sell-side” because they come up with investment ideas for their clients and sell them those trades. Investment management is when someone manages a portfolio of stocks, bonds, real estate – anything – for the investor. Again, an asset management firm can have a variety of clients, ranging from pension funds to companies to individuals. An investment manager devises an investment strategy for the client and keeps them updated regularly with reports and analysis. Investment management funds are part of the buy-side because they buy the different products from investment banks to maximise their portfolios. Since presumably you are reading this because you are considering a finance career, let’s compare both of these in terms of the job. Structure Investment banks don’t take deposits, so they use their own capital and that of investors to make a profit. This means that by and large if the trades don’t make money, oops... By contrast investment management firms, such as hedge funds, charge their investors a fee no matter what. So if you’re an investment manager and you don’t make you clients money on a single investment, your firm will still make money and you will still get paid, pretty sweet, huh?

“Because this is now a truly global world, there is a market somewhere open at all hours so the possibility of working round the clock is real.”
Pay Traditionally, working at a place like a hedge fund will get you a better salary (all those client fees). But now after the economic crisis, the pay scale on the buy-side and sell-side is starting to even out. Of course both sides compensate their employees with good basic salaries and bonuses. Perhaps the main difference in pay is that investment banks will generally pay part of the annual bonus in stock of the bank and investment management firms pay their entire bonuses in cash. Those shares typically don’t vest (become yours) for a few years (for

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WHAT YOU ALSO NEED TO KNOW

example, they could offer you a certain amount of stock, which defers over three years so each year only a third of that stock becomes yours) so if you’re thinking of leaving your investment banking job before then, you’ll have to find a new company that will buy out your stock as part of your new employment agreement, or you’ll just have to walk away from it; definitely a point to think about if you’re debating whether to join the buy or sellside.

your books to see whether you’ve been smart with your trades, or lost heaps of cash. Salespeople at investment banks have targets they have to hit and those can be brutal measures of worth to the bank. Hours Hours can be insane on both sides, but this depends greatly on where you’re working. Traditionally, employees at investment banks have longer hours and they can be LONG. If you have to trade with a country on the other side of the world you’re getting into the office at a ridiculous hour, waking up in the middle of the night to trade, or having a fun little sleepover at your desk. Depending on which markets you’re working in, you have to be in the office when everything kicks off and those times can vary. Because this is now a truly global world, there is a market somewhere open at all hours so the possibility of working round the clock is real. Working at a place like a hedge fund can mean more normal working hours, but it doesn’t exempt you from early starts, long days, and trades and decisions from home. Career advancement This depends greatly on your institution. Normally, it has been easier for people to advance at smaller funds than at large investment banks. At a smaller fund it may also be easier to move into another department, if you find you’d like to take your career into a slightly different direction. But that doesn’t mean that there’s nowhere to go at an investment bank. If you get an interview on either the buy-side or the sell-side, make sure you enquire about this, as it really depends from place to place. Only you can tell whether investment banking or investment management is right for you. Don’t believe every stereotype you hear about the buyside or the sell-side, as there are so many different kinds of institutions, really everything is a variable. As long as you go with the job that suits you best, there are no wrong choices.

“If you don’t already know that stress is an integral part of any finance job, then you have a lot to learn about the sector.”
There’s also been a change in pay structure because of the impact of the financial crisis and in response to the public outcry over those “fat cat bankers”. Many investment banks are making some of their bonus payments deferred, usually for three years. This means that it will be three whole years until you get the full bonus amount! If you’re planning on staying at one particular investment bank for the long haul, this might not matter to you. But if you want flexibility and an easier time if things turn pear-shaped, then this will not help. Traditionally, investment management firms have not done this, but some are starting to consider it too. Stress If you don’t already know that stress is an integral part of any finance job, then you have a lot to learn about the sector. Working in either type of organisation means that you will be stressed out. Even if you work at an asset management firm, though you will have those client fees to fall back on, if you don’t make the clients money they will not be pleased and could redeem, a.k.a. pull their money out of your fund, and that is bad. If you decide you want to become a trader at an investment bank, colleagues will have access to

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GLOBAL BANKING TRAINING
LONDON

Elite Investment Banking Internship
in partnership with Mid-Market Investment Bank

SAMPLE OF YOUR CV AFTER ELITE PROGRAMME
[Your Name]
Investment banking summer analyst, M&A Department [2] Months

[Bank Name]
v Analysed cross border transactions in Energy sector. v Helped originating deals with senior deal teams and interacted with clients v Prepared buy and sell side transaction pitches, teasers, and writing confidential investment memo (CIM). v Valued a US$100-million company by using Comparable, Transactions comps and Discounted Cash Flow Analysis (DCF) methods. v Built fully-integrated financial statements 5-year projection model and DCF model v Built transaction ready merger models for live transactions. v Built Excel financial model for leveraged buyout transaction of the company for a private equity sponsor. v Prepared the presentation and presented the transaction to the board. v For details, please see deal list (you will list the deals you have executed during your 2-month work experience)

The 2-month internship provides the real world experience as follows:
u u

1 month Global Investment Banking Analyst/Associate training 1 month of client facing investment banking transaction internship with the following experience: u Benchmark and work on live transaction documents (teasers, CIM, valuation financial models) u Attend conference calls with senior management (CEO, CFOs) of corporate clients u Attend in-person meetings with board members of corporate clients u Attend transaction team strategy sessions u Learn legal documents of investment banking transactions u Learn structuring of cross-border transactions u Learn live negotiation

Please send your CV to [email protected]

How to Apply

Contact us: Address: 40 Cannon Street, London EC4N 6JJ
[email protected]

Tel: +44 207 539 3548

THE BANKING INTERVIEW

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THE BANKING INTERVIEW

Tricky interview questions
CORPORATE FINANCE/CORPORATE VALUATION
How do you value a company? This is quite a broad question, so start with the methods you would use and go through them one at a time. It will also impress if you discuss the pros and cons of each method. The main ways to value a company are: precedent transactions analysis, comparable company analysis and discounted cash flow analysis. 1. Precedent Transactions Analysis This is when you look at how much others have paid for similar companies to the one you are valuing to determine how much the company is worth. To use this method effectively you need to be extremely familiar with the industry of the company you are valuing as well as the normal premiums paid for such a company. This can be a relatively easy method to use since all the information is public and thus easy to obtain and also since the past transactions actually happened, you can be confident that analysis based on this is extremely plausible. But on the other hand, what if the market during the past transactions was extremely different from present market conditions? Can you really base the value of one company on the value of another that is not exactly the same? These are some issues you should think about before your interview so you can discuss them at length with your interviewer. 2. Comparable Company Analysis This is similar to Precedent Transactions Analysis except you are using the whole company as a comparison unit, not the purchase of a company. So to use this method you would also seek out similar companies to the one you are valuing and look at their price vs. earnings, EBITDA, stock price and any other variables you think would be an indicator of the health of a company. 3. Discounted Cash Flow Analysis This is when you use future cash flow, or what the company will make in the future, to determine what the company is worth now. To calculate DCF you need to work out what the projected or future cash flow is for a company for the next 10 years. Then work out how much that would be in today’s terms by “discounting” it at the rate that would give a return on investment. Then you add in the terminal value of the company and that will tell you how much the company is worth. Though this is the preferred method to value a company, it still has its flaws because the projected earning and discounted rate are figures that you set using your best guess, there’s no concrete maths equation to work it out so DCF does have a certain amount of subjectivity to it. What’s a leveraged buyout? A leveraged buyout (LBO) is when a company or investor buys another company using mostly borrowed money, loans or even bonds to be able to make the purchase. The assets of the company being acquired are usually used a collateral for those loans. Sometimes the ratio of debt to equity in an LBO can be 90-10. Any debt percentage higher than that can lead to bankruptcy.

EQUITIES
What is a P/E ratio? This stands for price to earnings and simply is the price of the share divided by the earnings per share (EPS). This will tell you the price of the stock related to the earnings of the company. So if a stock has a high P/E ratio that means it’s expensive as you are

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paying more for those earnings per share. If two companies have the same EPS but one has a higher P/E ratio, that one is a more expensive of the two and means you are paying more for the same EPS. Often the P/E ratio as expressed by saying that a company is trading at 20 times its earnings if it has a P/E ratio of 20. What is a PEG ratio? This stands for Price/earnings to growth ratio and takes the P/E ratio and then accounts for how fast the EPS for the company will grow. A stock that is growing rapidly will have a higher PEG ratio. A stock that is well priced will have the same P/E ratio and PEG ratio. So if a company’s P/E ratio is 20 and its PEG ratio is also 20 some might argue that the stock is too expensive if another company with the same EPS has a lower P/E ratio, but that also means that it’s growing faster because the PEG rate is 20. Tell me about specific stocks you like The interviewer may ask you about individual stocks or companies and what you think of them. They may also ask you to “pitch a stock”, which means you’ll have to pick a company you know of and make a strong argument as to why investing in them is a good idea. It goes without saying: if you are not up on the latest stock news, financial trends, and general business current events, you shouldn’t be in the interview in the first place. Before your interview make sure to take a close look at a few companies and their stocks, pick two or three that you would buy. Write down brief bullet points as to why you would buy them (Are you impressed with their management? Have they successfully negotiated a tricky situation? Do their financials look particularly healthy to you? Do their institutional investors give you confidence?), a bit about the company and also list some similar companies that have done well so you can use them as favourable comparisons. Basically, you need to know everything about these companies from why they’ve been in the news lately to which market factors could affect them. Even go into detail about their cash flow statements so you know the company inside and out. Most importantly, make sure you can argue your point well and think about how to defend yourself if your interviewer plays “devil’s advocate” to try

to rattle you. Also do this same exercise for a few companies you would short. You can never prepare enough of this specific kind of information in preparation for an investment management interview. Let’s discuss a company that you think is undervalued. Why is it undervalued? Give me an example of a company you think is overvalued and why. It goes without saying: if you don’t read up on the financial aspects of multinational companies, the latest industry news or study any trends, then you will not have a successful interview. Look into some companies and their stocks and then decide whether you think they are overvalued or undervalued. Write down why you think that along with facts to bolster your argument. Try to memorise your points but it wouldn’t hurt to have them with you so you can quickly refer to them (avoid blatantly reading off the page). If you can pick out a company whose stock has gone down based on some bad press, but you’re not convinced that the bad press is really going to affect the bottom line - that would be an example of a company that you think is undervalued. Obviously, go into as much detail as possible. Any knowledge of the industry, history of specific companies and any other knowledge you can display in your interview, the better.

FIXED INCOME
What is duration/Macaulay duration/Modified duration? Duration is a measure in years that not only measure how the bond will react to changing interest rates, but also how long it will take for the fixed income payments to be made Macaulay’s Duration is a formula widely used to calculate duration and is named after the man who came up with the formula, Frederick Macaulay. This weighted formula has been around since 1938 (if you are technically-minded and it is appropriate to the position you are interviewing for, you may go into detail about the actual formula).

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THE BANKING INTERVIEW

determined price. To compensate for the possibility of redeeming the bond before the maturity date, these bonds have higher coupons (amount of interest paid to the investor).

FX
Define risk adjusted rate of returns? When looking at an investment you cannot simply look at the return that is projected. If the profit from investment A is greater than the profit from investment B you may immediately want to go with investment A. But investment A might have a greater chance of a total loss than investment B so even though the profit may be larger, it is a lot riskier and therefore not necessarily a better investment. Adjusted rate of return is when you not only look at the return that an investment may give you, but you also measure the risk of that investment. The adjusted rate of return is usually denoted as a number or rating. If you are technically minded you may also want to mention the ways that risk is measured: beta, alpha, the Sharpe ratio, r-squared and standard deviation. Would a price of a call option go up or down when the maturity of the option is longer? In an option, the price is pre-determined when the contract is written up. That is why an option is so attractive to both sides – the price is locked in so that if the price of the instrument in question goes down, the seller is protected and if it goes up, the buyer will get a good deal. So the actual price of the option doesn’t change. Whether the market rate for the particular instrument goes up or down depends on the market and can go either way no matter how long the contract is for. Since a call option is to buy a futures contract (a put option is to sell one) you would have to be confident that the price would rise during the length of the contract to make the option profitable for you.

Modified duration only deals with the question of price relative to fluctuating interest rates and does not go into the weighted average of time until repayment. What is convexity? This is a more accurate measure of the relationship between yield and price changes in bonds in relation to the change in interest rates. Duration calculates this as a straight line, when in actuality it is a convex curve, hence the name. This is used as a risk calculation because it can tell how a bond yield will respond to interest rate changes. Tell me about the different kinds of bonds. Here are a few different bonds you should know about: • Plain Vanilla – the most simple kind of bond where everything is spelled out at the start – a fixed maturity/expiry date, when the principal is due and how much and how often the interest is paid. • Convertible – this can be converted into the issuing company’s stock at a fixed price. Good for the buyer as it is a bond with an option to buy stock if they decide they want to invest that way. Good for the issuing company as it offsets the potentially negative reason they might issue stock in the first place. • Callable – sometimes also called a redeemable bond, this is when the bond has a call date, or dates, when the issuer has the right, not the obligation to buy back the bond at a pre-

What is the Euro/Pound exchange rate today? Where do you think it will be in one year and why? Obviously you need to keep up on the currency

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market at all times as it can change in a matter of minutes. Right before your interview check the prices of the major currencies (GBP, EUR, USD, JPY, CHF), the ones that interest you the most and of course, if the bank or firm tends to focus on one market or area, make sure you know what those currencies are doing. The part of the question that deals with what you think about that exchange rate in the future has to come from your views on the market. Be prepared to give your opinion and then be able to back it up with facts, historical evidence and corollary evidence. This is your opinion so really there is no wrong answer, but if you are unable to intelligently articulate why you hold the views that you do, you will not have a successful interview. If the Yuan (CNY)/USD exchange rate is 100 CNY/1 USD today and the one year forward rate is 105 CNY/1 USD, what does this imply? Since in a year it will take more yuan to equal one dollar that implies that the yuan is weaker than the dollar. The dollar is stronger because it can buy more yuan in a year from now than today.

sure to crop up in your discussion. Think about the impact that an increased number of people trading have and how as it’s easier for individuals and novices to trade, how has this affected the commodities market. As for the asset management portion of the question, simply think about how you would advise a client about investing in commodities and what issues that client would face in doing so. Try to tie in specific commodities such as gold. What is the current price of gold, corn, wheat, etc? Right before your interview check Reuters, Bloomberg or another website or newspaper and jot down the price of major commodities from precious metals, other metals, food, energy and oil/fuel. Obviously if you know the role will focus on one of these categories, focus your research there. Have you ever advised your client to invest in a commodity market and the client has faced losses after taking your suggestion? In such situation how would you try to cover up the losses of the client? This will be a hard question to tackle if you have not had any previous experience in the industry. If you have had work experience, definitely mention that, even if you did not directly advise a client. If you have, be honest about the situation and what the result was. If you have never advised a client, say so, but then add that if you had advised a client, or if in the future you are advising a client and that client suffered a loss you would do x. Don’t say that client losses haven’t happened/won’t happen to you because you are that good! Everyone experiences losses at some point in their financial career. What the interviewer is looking for is how you deal with those difficult times. Of course clients will not be happy with a loss but how will you make it up to them? What new, creative investment have you been working on that will make them back their money plus more? Make sure you highlight how you have/would turn a negative situation into a positive one (and make sure you highlight your soft skills and your ease at dealing with clients too).

COMMODITIES
What has fuelled the commodities boom of recent years and why? What are its implications for the asset management industry? If you have had any work experience in commodities, be sure to relate your work to why you think there has been resurgence in commodities after a brief dip due to the credit crisis. You don’t have to go into minute detail, but any real world experience you can point to will be a plus. Be sure to discuss the rise in emerging market populations and why this has had such a strong impact on the demand of food commodities. Discuss all of the electronics that everyone has today (iPads, iPods, mobile phones) and how that has impacted the prices for metals used to make those gadgets (mention specifically palladium, cadmium, nickel and platinum). Also read up on what oil is doing before your interview as this is

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THE BANKING INTERVIEW

BUY-SIDE/INVESTMENT MANAGEMENT/HEDGE FUND QUESTIONS
Why do you want to work on the buy-side and not the sell-side? Go back to the chapter on buy-side vs. sell-side as that can help you start to form your argument. Maybe you were attracted to the buy-side because of the wide range of companies you could work for (such as hedge funds, asset management firms and mutual funds) or the various different securities you could manage? Maybe you liked the structure or culture of most buy-side firms more than the sell-side? They may also ask you why you’re not pursuing work in consulting. This is something you’ll have to decide for yourself but you must come up with a few points to make sure they know you’re not just going to jump ship to an investment bank in a year’s time. If I introduce a risky stock into a portfolio, is that good or bad? This is not a yes or no answer. One stock does not a portfolio make; the health of a portfolio depends on all of its parts and how they work together, or are correlated. Generally stocks that are negatively correlated make for a less risky portfolio (so a petrol company and an airline would be negatively correlated since when the price of petrol goes up, it’s good for the petrol company but bad for the airline as it makes their cost rise). On a related note, to be a good investment manager you’ll have to take some risk. If you convey in the interview that you are not comfortable taking any risk and probably would not do so if hired, rather than convince them that you are careful, this will convince them that you won’t make any money for the company. The amount of risk you’re allowed and encouraged to take varies from place to place, but you may as well get used to the idea now that you’re going to have to take some risk to be a successful investment manager.

Since you have no previous experience in the markets, tell me why you want to work here and why are you interested in investment management? This is the most important question for those who have decided on a career change or for those grads who are applying for their first job. They are not going to expect you to be familiar with detailed financial models or know advanced algorithms, but you will have to tell them why you are interested in the markets, describe what about following stocks and companies excites you and highlight which of your qualities makes you best suited to work on the buy-side. People in the industry say that when they first got into the business, their initial interviewers did not expect them to know the technical stuff, they only really looked for people with strong personalities, enthusiasm and drive – don’t underestimate the power of those qualities.

MISC/GENERAL
What is an income statement? This is just a simple record of a company’s gains and losses, including expenses. The income sheet represents a specified amount of time and includes everything from the cost of renting the office to the depreciation of assets. What is a cash flow statement? A cash flow statement tracks the actual cash that goes in and out of a company. This is important to see how liquid the company is. If it is rich in assets but not necessarily cash, there could be problems. Explain to me what makes up a cash flow statement The place to start when looking at a cash flow statement is the beginning cash balance. Then you must look at cash from operations, then the cash made from any investments, then cash from financing. All of that will make up the ending cash

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Interview Advice & Tips on Getting Hired
The investment banking recruitment process is lengthy and is described as being anything from “very rigorous” at J.P. Morgan, to “relaxed” at Morgan Stanley, to both “very tough” and “rigorous” at Goldman Sachs. Candidates can expect to face multiple rounds of interviews and are tested on a wide range of different skills. To even get a look in, you’ll most likely need a good 2:1 from a decent university – though you’ll need to make that 1st if you are aiming for Goldman Sachs and some of its closest competitors. The discipline of your degree is not important, although a background in finance, business or engineering is useful. More crucial is that you have strong numerical skills in your arsenal. of competency based questions. These invariably include posers on your career choice and academic background. The firms will also most likely test your knowledge of the industry – so make sure you stay abreast of current banking affairs. Take your time with your answers, and although it may sound obvious, make sure that you actually answer the questions asked – it’s all too easy to waffle on without getting to the point. Furthermore, be wary of grammar, syntax and sentence structure. Tests More often than not you will be asked to sit online tests immediately following the submission of your application. Your score will then join your application form as a means to assess your suitability for progression to the next round. If you make it through to the interview stage, expect another similar test – set to ensure no cheating has occurred.

“To even get a look in, you’ll most likely need a good 2:1 from a decent university.”
Applications Graduate recruitment varies by region, by role and by scheme, yet you’ll be hard pushed to find a bank that doesn’t use an online application form as the first appraisal process during hiring. There are exceptions; Deutsche Bank and Citi for instance allow its applicants to attach a CV, covering letter, references and a record of academic history. But on the whole banking applicants have to make their case in the framework set out in the firms’ forms. After decanting your personal details and academic history from your CV into the form, expect a set

“If you don’t make the grade you won’t be invited through to next stage, no matter how glowing your CV is.”
Typically, investment banks will ask candidates to sit both numeracy and non-verbal tests. The former will unsurprisingly be maths based, but some firms, such as UBS will also include questions to test your logical ability. Citi goes a step further, with psychological tests comprising the earlier stage of its recruitment process. Again, your logic will be put to the test as well as your analytical ability.

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THE BANKING INTERVIEW

As mentioned earlier, the process can vary according to role – and there’s no better example of this than Citi. Those applying to operations, technology and HR will have to pass a logical reasoning test if they hope to make it to interview; whereas other business lines have to master the numeric test. With Barclays Capital, hopefuls begin with an aptitude test designed to assess logical reasoning; only on passing this will applicants sit the verbal reasoning test. From firm to firm, the tests will vary in length; but you can safely expect to be given a time frame around the half hour mark. Do not be under any illusion: if you don’t make the grade you won’t be invited through to next stage, no matter how glowing your CV is. To alleviate the pressure on yourself – make sure you find a quiet space and don’t leave sitting it until the last minute. Do not be fooled, practice does make perfect. Practice sample tests can be found online, so there’s no excuse for being unprepared! Practice free -online tests. Phone Interviews with HR The first hurdle many applicants face will be a screening interview with a member of HR. A number of firms incorporate this into their process, including Morgan Stanley, Barclays Capital and BNP Paribas. Typically these are held over the phone and last around 40 minutes. Candidates are normally asked a set list of questions and will need to explain their motivation for applying to that particular role and that particular company. A favourite at Barclays Capital for instance, is to ask candidates about recent examples of the company being in the news. With this in mind, it’s important to stay abreast on current banking affairs and make sure you know your CV inside and out. Phone interviews are no walk in the park. The lack of face to face contact can make it harder to communicate and gauge what the employer is thinking. The key is to focus and concentrate on communicating your enthusiasm for the role over the phone. Furthermore, have a pen and paper to hand to note down anything of importance and make sure you prepare before answering the phone.

Assessment Day The majority of firms now include some form of assessment centre in their application process. The format not only differs from firm to firm, but it can also differ within a company depending on the role. However, assessment centres typically they follow the format used at BofA Merrill Lynch and Citi: case study, interviews, tests, and group exercises. Some firms will throw the odd curveball into their assessments. UBS for instance drops a presentation into the mix. Based on a case study, candidates will have to prepare a 10 minute presentation within only 45 minutes. Even the best presenters should expect a bombardment of questions and criticism

“No firm’s procedure is alike, and similarly each firm is susceptible to different things.”
following their delivery. Don’t take it personally though – listen to the comments and argue constructively and concisely. Tests will take the form of both numerical and verbal reasoning examination. While these might not be too difficult, like the online tests, you’ll still need to both practice and prepare. Group exercises will see candidates placed in teams ranging from two to eight. The standard is a business related scenario and a time frame to discuss it in. Groups are monitored closely, with firms looking for those that strike the balance of being heard and leaving others room to put their points across. Remember, balance is key. Sometimes assessment centres are broken down in to two stages. At J.P. Morgan for example, candidates sit a test, have two interviews, attend a mixer on one day and then if successful, attend a second day where they give a presentation and face more interviews. Similarly Morgan Stanley has a two day assessment centre.

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Interviews The style and number of interviews varies from firm to firm. Initially competency based, interviews will grill you on your leadership, creativity and teamwork. They’ll be the standard, ‘tell me a time when…’ questions, and the ‘why this firm/ industry/division?’ posers. Later on the process, interviews will be chiefly technical, although expect a sprinkling of competencies here and there. Interviews can represent the bulk of the process, as is the case with Deutsche Bank, or they can be the culmination of an assessment day, e.g. BofA Merrill Lynch . At BNP Paribas, candidates face between three and five interviews in what is described as a “collaborative process”, whereby the firm only makes an offer with the mutual agreement of all interviewers. Elsewhere, Rothschild follows up a preliminary individual interview with a panel interview. J.P. Morgan reviews and tests its candidates in multiple rounds, with candidates facing interviews by members of different business areas. At Goldman Sachs, a manager says, “the usual interview topics include candidate’s motivation for becoming a banker at the firm, their technical skills and cultural fit.”

Questions in the interview will vary depending on the company, the interview stage and the interviewer themselves. Usually they will be either competency-based or technical, but it’s best to prepare for every eventuality. Think about the reasons for the choices you have made – both academic and extracurricular – and make sure your knowledge of the firm and the industry is up to date. No firm’s procedure is alike, and similarly each firm is susceptible to different things. At Nomura, for instance, personality is said to be as important as ability; while Morgan Stanley are reputedly especially receptive to enthusiastic candidates. One of the firm’s associates said “they tried to see what I was most interested in, capable of and whether I was good fit.” Lazard looks for original ideas and a passion for business, and an associate at J.P. Morgan said that their firm places “a strong emphasis on communication skills.” The trick is to do your homework. Quite simply, give the firm what they want, whilst also being yourself and letting your best strengths shine through.

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THE BANKING INTERVIEW

ANALYsING FINANCIAL STATEMENTS
Understanding financial statements (or accounts) and how they interplay is fundamental to any job in investment banking. Most likely, during the interview you won’t be asked to perform a detailed accounting analysis of a company but any bank you apply to will expect you to be able to review, interpret and comment on financial statements. The trick to succeeding is first to understand the data you’re being asked to analyse and secondly to be able to link it back to the question that was given to you by the interviewer. Financial statements, put simply, represent all the relevant financial information of a company, presented in a structured manner and in a form easy to understand. There are four basic financial statements that provide the information needed to evaluate a company. They include: • • • • The Balance Sheet The Income Statement The Statements of Retained Earnings The Statements of Cash Flows Equity reveals the net worth of a company: this equals the assets that the company owns less the debts they owe to creditors. Equity can also be defined as the claims that investors have on the company’s resources. In a nutshell, the Balance Sheet represents the economic resources of a company, including the claims that creditors and equity holders have on those resources. When looking at a balance sheet it’s also important to understand that companies can obtain resources, (e.g. cash), from both creditors and investors, and why the two are different. Debts from creditors are classified as a Liability, whereas equity from investors are classified as Equity. Companies incur debts from creditors to, for example, purchase resources necessary to run their businesses and promise to pay that debt back over a specified period of time, regardless of the operating performance of the company. Companies also look to investors to acquire economic resources. However, companies don’t promise to pay investors back a specified amount over a specified period of time. Instead, companies promise investors a return on their investment often contingent on the operating performance of the company. Since an equity holder’s investment is not guaranteed, it is more risky that a loan made by a creditor. Debts owed to creditors are more “senior” than the investments of equity holders and are classified as Liabilities, while equity investments are accounted for in the Equity section of the Balance Sheet.

Here’s a closer look at each:

1) The Balance Sheet

The Balance Sheet presents the financial position of a company at a given point in time. It includes three sections: Assets, Liabilities and Equity. Assets are the economic resources that the company uses to run its business. They include Cash, Inventory and Equipment. Liabilities presents the debts of the company. Liabilities represent what the company owes, in other words, the claims that creditors have on the company’s resources.

2) The Income Statement

In addition to incurring debt and seeking new investors, a company can also obtain the resources necessary to operate its business through its own operations. The Income Statement presents the

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results of operations of a business over a specified period of time, (e.g. one month, one quarter, one year), and includes 3 elements: Revenues, Expenses and Net Income. Revenue is the amount of money that a company receives during a specific period. It is the “top line” or “gross income” figure from which costs are subtracted to determine net income. Revenue is generally calculated by multiplying the price at which goods or services are sold by the number of units or amount sold within a time period. Expenses are the opposite of revenue. Expenses are the costs incurred by a business over a specified period of time to generate the revenues earned during that same period of time. For example, in order for Buzz Snowboards to sell snowboards, it must buy all the materials needed (wood, plastic, aluminium, paint, etc.) to make snowboards. Buzz Snowboard must also pay employees to both make and sell the product and operate the business. These are examples of expenses that a company can incur in order to operate. So, when is a purchase considered an asset, and when is it considered an expense? Assets vs. expenses: A purchase is considered an asset if it provides the company with future economic benefit, while expenses only relate to the current period. For example, monthly salaries paid to employees for services already rendered during the month would be considered expenses. On the other hand, purchasing a computer or manufacturing equipment would be called an asset, as it will probably be used for more than one accounting period. Net Income: Often referred to as the “bottom line”, net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company’s income statement and is an important measure of how profitable the company is over a period of time. A positive net income number indicates a profit, while a negative net income number indicates that a company suffered a loss, (called a “net loss”).

3) The Statement of Retained Earnings

This statement explains the changes in a company’s retained earnings over a specific reporting period. Retained earnings represent the portion of net income which is retained by the company rather than distributed to its owners (as dividends). Conversely, if the company takes a loss, then that loss is retained and called variously retained losses. The Statement of Retained Earnings doesn’t provide any new information not already reflected in other financial statements. But it does provide information on what management is doing with the company’s earnings. Management may be re-investing some or all of the company’s net income into the business, distributing some or all of its income to shareholders (in the form of dividends).

4) The Statement of Cash Flows

The Statement of Cash Flows shows how changes in balance sheet accounts and income affect cash and cash equivalents. Essentially, the cash flow statement is concerned with the flow of cash in and cash out of the business and is a useful in determining the shortterm viability of a company, particularly its ability to pay bills. Remember that the Income Statement provides information about the economic resources involved in the operation of a company. However, the Income Statement does not provide information about the actual source and use of cash generated during its operations. That’s because obtaining and using economic resources doesn’t always involve cash. For example, let’s say you went shopping and bought a new snowboard on your credit card in August, but didn’t pay the bill until September. Although the store did not receive cash in August, the sale would still be considered August revenue.

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The ABCs of Investment Banking

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The ABCs of Investment Banking
ACCRUED INTEREST
A method used in accounting where the interest either interest you have to pay or interest you are owed is recorded but has not yet been received or paid.

Chinese Wall

Arbitrage

Using the price difference of one or two similar instruments to make a profit by buying and selling that instrument simultaneously.

Asset Management

This is a theoretical wall that exists in financial institutions to keep departments that may create a conflict of interest separate. For example, the corporate advisory team that helps companies navigate takeovers will be kept separate from salespeople who try to get their clients to invest in company shares so that no insider trading can take place. Recently there has been a movement to rename the term so some people call it a firewall or cone of silence.

Managing the investment portfolio of a client. This is done either by a specialist financial company or an investment bank.

Bond

Balance Sheet

Highlights one point in time to show a company’s overall financial health. The three basic parts of a balance sheet are: assets, liabilities and shareholder equity.

Similar to a loan, the bond is an IOU issued by a company or government in return for money provided by investors (bondholders). The issuing company pays interest on a fixed schedule to the bondholder and then pays back the principal at the maturity date. One of many methods of raising capital, it is a form of debt.

Black Scholes Black Swan

Brady Bond

The mathematic formula on which futures and options instruments are based. This is an event that happens unexpectedly and cannot be predicted. A black swan is something that falls outside of any financial modelling so no one knows it is coming. The term was coined by Nassim Nicholas Taleb because a black swan is so rare.

These are bonds issued by emerging markets governments and are a good way to gauge markets in those countries; most Brady Bonds come from Latin America.

Buy-side

Blue Chip

The buy side is made up of hedge funds and other asset management companies such as mutual funds and pension funds. They are essentially customers of the investment banks who are buying any trades or investments that the banks suggest, hence they are called the buy side.

A large company that is universally thought of to be stable. Buying stocks/shares of a blue chip company are usually considered non-risky investments and a way to boost portfolios.

Cable

Slang term for the USD/GBP exchange rate. It’s called cable because the exchange rate used to be communicated by transatlantic cable.

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ABCs OF INVESTMENT BANKING

Call

A type of option where a trade is agreed to take place on a certain date in the future for an agreed upon price. The trade doesn’t necessarily take place but the right to make the trade does.

Done

Call Price

Said at the end of a trade when the transaction has been agreed. Once “done” is out of your mouth, or even if you type it during an exchange, it is binding and means you accept the price quoted.

The price at which a stock or bond can be bought back by the issuer.

Due Diligence

Commodities

Goods that are uniformly traded through a commodities exchange. Soft commodities include crops such as grains, cocoa and sugar. Hard commodities are mined such as copper, gold and silver.

The detailed study of information about a company, such as its accounts and activities, prior to an acquisition or take-over.

EBITDA

Debt

Money borrowed loans or bonds.

by

companies,

such

as

Debt Financing

A way companies raise capital by issuing bonds or bills. The money is often used to expand business or to buy new equipment.

This stands for Earnings Before Interest, Taxes, Depreciation and Amortisation. Many people use this metric to value a company when there is no way to measure EPS, because they have not issued shares. Some people don’t pay attention to EBITDA and actually think it’s the wrong way to try to value a company because even a company that’s not in the red can have a good EBITDA (remember the dot com bubble?)

Emerging Market Equity

Debt Security

A country with a growing economy but one that usually carries a lot of risk. Shares in a company.

An instrument such as a bond or security, that pays the principal to the lender at the end of the security. They are usually considered less risky than an equities security.

Equity Security

Deliverables

see equity; a company’s stock.

This is what you are working towards in any kind of project, it’s the good or service you are promising to deliver at the end of a project. Depending on where you work this could mean installing a new IT system or creating a new financial model.

Equity Derivatives Fannie Mae

A derivative whose value is dependent on an equities security. Stands for: the Federal National Mortgage Association and it was created in America during the Great Depression. The organisation does not lend to the public, but rather is there so that mortgage brokers and other organisations that do give out mortgages have enough money to lend to people seeking mortgages. The money that Fannie Mae loans banks and mortgage brokers enables them to lend to the public at affordable rates.

Derivatives

A financial product whose value depends on changing variables. Derivatives include futures, swaps and options.

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The Fed

Federal Reserve, more formally, it is the central bank of the United States. It is run by a chairman who is appointed by the president. Even if you do not work in the US, any decision or announcement by The Fed will affect your market.

Hostile Bid

An attempt to acquire a company without the approval of the target’s shareholders/owners.

Interest Rate

Flotation

The admission of a new company to a stock exchange, so that its shares can be traded publicly. See IPO.

A percentage of a loan (the principal) that the borrower pays to the lender as compensation for taking the cash or good borrowed.

IPO

Footsie

Slang term for the FTSE 100, an index of the top 100 UK companies initially started by the Financial Times.

Initial Public Offering of shares of a company on a stock market. Also known as a flotation, it occurs when the privately owned shares in a company become publicly traded for the first time.

Late-day Trading

Forward

Contract where sale is agreed for a future date, but price is agreed and paid today. Less formal than futures so there is risk of default.

While not illegal, it certainly raises eyebrows. It is when a hedge fund trades shares of mutual funds (can be other securities but not often) after hours, but records the transactions as having taken place during trading hours.

Freddie Mac

Stands for: the Federal Home Loan Mortgage Corporation, which was founded in 1970. It is backed by the US government, though it is a public company. Freddie Mac buys mortgages on the secondary market, then combines them together to create mortgage-backed securities, which are then sold to people looking for an investment. As of 2008 both Freddie Mac and Fannie Mae were put under conservatorship of the Federal Housing Finance Agency in response to the subprime mortgage crisis.

Long (position)

When you buy a security of a company you are long them as you have a view that the value will rise. In options you are long when you buy an options contract.

M&A

Mergers and acquisitions. The area of legal practice specialising in advising companies on merging with, or buying, other companies. Comprises the bulk of corporate work.

Futures

Marked-to-Market

Contract similar to forwards where trade is agreed for a future date but price is agreed and paid today. More formal so contract details must be adhered to.

A final price which is fixed at the end of each day. Considered the closing price; books, balances and trades must be reconciled with the marked-tomarket price at the end of each day as it affects the value of trades that day.

Going Public

This is what happens in an IPO (initial public offering), when a company sells shares publicly for the first time. Companies may choose an IPO as a way to raise capital. See Floatation

Mid Cap

Mid-sized company that is smaller than a large cap (blue chip) company, but larger than a small cap company. Monetary values that make up the three categories change from time to time.

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ABCs OF INVESTMENT BANKING

Market Cap

Otherwise known as market capitalisation, this is how some stock indexes determine the importance or value of a company. You calculate it by taking the price of a company’s share and multiply it by the number of shares outstanding, in theory giving the value of the entire company.

Private Equity

An area of legal practice advising on the funding (through shares or loans) provided by specialist organisations to unquoted companies.

Proprietary Trading

Mine

A trading term (mainly in FX) that means buy.

Also known as prop trading. This is when a bank or firm uses its own money to invest in anything from commodities to stocks to bonds to currency.

Mortgage-Backed Securities

Punter

An investment security that is made up of many different mortgages purchased on the secondary market. A residential mortgage-backed security can be purchased by an individual and a commercial mortgage-backed security is for commercial properties. By investing in a commercial mortgagebacked security, you are basically lending to a mortgage broker so that they can give potential homeowners, who may not be able to afford a traditional mortgage, a chance to be a homeowner.

Another word for a gambler (online betting sites use this term) but specifically in finance is one who speculates rather than trades for investments to own.

Restructuring

A way to make a company more profitable by revamping the framework of a company and can include the legal, managerial or operational aspects of a company.

Negative equity

Securities

When an asset dips in price so that the actual value of the asset becomes less than the remainder of the loan that was taken out to secure the asset.

Forms of investment in a company, can either be shares (equity) or bonds (debt).

Securitisation

Options

An investment where you are given the right to a trade but not a firm commitment that you must do the trade. This instrument gives you the option to do the trade, or not do the trade during the specified length of the contract.

A method of raising finance by obtaining loans that are ‘secured’ against a particular asset of the company (asset-backed loan). The loans go into a Special Purpose Vehicle and therefore do not appear on the company’s balance sheet.

Sell side

Ponzi Scheme

This is an investment scam promising high returns. Investors are paid those returns not by the profit made by the investment, but rather using the initial investment of new investors. The bigger a Ponzi Scheme gets, the more new investors they need to keep up the illusion that the “investments” are yielding high returns. It is named after Charles Ponzi, who set up the first such scam but more recently Bernie Madoff was in the news for orchestrating a far-reaching Ponzi Scheme.

Another name for investment banks; because they sell investments to hedge funds, mutual funds and other kinds of investment management firms.

Short (position)

This is when you borrow a security, sell it, then buy it back. You only do this with securities you think will fall so that you sell it at one price, buy it back for a lower price and make money on the transaction.

Spot Price

Price that is agreed and settled usually in two days. The shortest kind of transaction.

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ABCs OF INVESTMENT BANKING

Spread

This is the difference between the ask and the bid, or the price you can sell a security or asset at and the price you can buy it at. So if you buy something for a lower price than you can sell it at, you’ve made money on the spread.

Venture Capital

Money provided by specialist organisations to invest in companies not listed on the stock exchange. Sometimes referred to as private equity and can be used to fund MBO/MBIs, for example.

Squawk Box

War Chest

Intercom still used on trading desks in banks and hedge funds so that traders, analysts and salespeople can communicate instantaneously.

Structured Products

Stockpile of funds that a company compiles if they are thinking of purchasing another company (or part of a company) or are guarding against a hostile takeover. Can be a good indicator of a future move or the future of a company.

Investment products that can be one security or a bundle of more than one option, currency or commodity that has a derivative element built in to give it a different risk/return rate.

Yours

A trading term in FX that means sell.

Underwriting

In finance, this is when a financial institution takes on the risk of selling stock of a certain company to clients. They are contracted to use their contacts to bring on people to invest in the issuing company’s stock.

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We see a future with so much to offer. Do you?
Around the world, growth is bringing new prosperity; businesses are pioneering new trade routes; and new centres of wealth and influence are emerging. At HSBC, we’re inspired by the ways the world is changing for our business and for our customers. That’s why we’re looking to connect with the best and the brightest people from across the globe. With so much to offer, we’re ideally placed to help you realise your ambitions.

Achieve your potential at HSBC. www.hsbc.com/insidebuzz
HSBC is committed to building a culture where all employees are valued, respected and opinions count. We take pride in providing a workplace that fosters continuous For more information visit professional development, flexiblecareers working and opportunities to growwww.insidebuzz.co.uk within an inclusive and diverse environment.

What you’ll Find Inside:
How well do you understand investment banking? Do you want to work in equities or corporate finance? Buy-side or sell-side, which right for you? Know your DCF from your EBITDA? Whether you’re a student or graduate considering a career in investment banking or you’re just looking to switch jobs within the industry, this guide will tell you everything you need to know about investment banking. Get the tools necessary to wow in your interview and land the job you want!

THIS GUIDE COVERS
• The ins and outs of investment banking • Career paths: the different roles and divisions • An inside look at corporate finance, sales and trading, equities, fixed income, commodities, foreign exchange and more... • The latest tips and advice on applications and interviews

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