1

CHAPTER 1
FINANCIAL ECONOMICS AND FINANCIAL MARKET

CELG
2 CONTENT

FINANCIAL FINANCIAL MARKETS FINANCIAL

ECONOMICS INSTITUTION
 3
READING MATERIALS
• Bodie, Merton, & Cleeton (2012) – Chapter 1+2
• Fabozzi & cộng sự (2011) - Chapter 7+8
4
SOME QUESTIONS YOU MAY FACE NOW & IN THE FUTURE

To save for the future, will you put your money in banks or invest?
You want to have a car. Will you buy or lease?

When working as a waiter in a restaurant, you intend to start your restaurant in the future, is it
worth? How much money do you need to prepare? & Where can you get money?
You are a member working in finance department of a company and analysing some projects, which
one do you recommend your company to conduct?
You work in a bank and are advising CFO whether and how much to give loans to low-income
customer, what will you advise?
 1. FINANCIAL ECONOMICS
5
Defining Finance

What do you know about ‘Finance’?

 1. FINANCIAL ECONOMICS
6
Defining Finance

✓Finance, as a scientific discipline, is the study of how to allocate scarce

resources over time.
✓Two features that distinguish financial decisions from other resource
allocation decisions:
- Spread out over time
- Not known with certainty
 1. FINANCIAL ECONOMICS
7 Study Finance

✓Analytical “Pillars” to Finance

- Optimization over time
- Asset valuation
- Risk management
 1. FINANCIAL ECONOMICS
8
Financial theory

✓Consist of
- A set of concepts that helps to organize one’s thinking about how
to allocate resources over time
- A set of quantitative models to help one evaluate alternatives,
make decisions, and implement them.
 1. FINANCIAL ECONOMICS
9
Why study finance?

✓To manage your personal resources

✓To deal with the world of business
✓To pursue interesting and rewarding career opportunities
✓To make informed public choices as a citizen
✓To expand your mind
1. FINANCIAL ECONOMICS
Why study finance?

PERSONAL CORPORATE
PUBLIC FINANCE
FINANCE FINANCE

10
 1. FINANCIAL ECONOMICS
11
Harry M. Markowitz (1927 ~
✓Awarded to the 1990 Nobel Prize
✓Main contribution:
-The father of modern portfolio theory
 1. FINANCIAL ECONOMICS
12
William F. Sharpe (1934 ~)
✓Awarded to the 1990 Nobel Prize
✓Main contribution:
- Developing the Capital Asset Pricing
Model (CAPM) theory.
 1. FINANCIAL ECONOMICS
13
Merton H. Miller (1923~2000)

✓Awarded to the 1990 Nobel Prize

✓Main contribution:
- The M&M (Modigliani-Miller) Theorem
 1. FINANCIAL ECONOMICS
14
Robert C. Merton (1944~)

✓Awarded to the 1997 Nobel Prize

✓Main contribution:
- The pricing of options and other
derivatives
 1. FINANCIAL ECONOMICS
15
Myron S. Scholes (1941~)

✓Awarded to the 1997 Nobel Prize

✓Main contribution:
- The pricing of options and other
derivatives
 1. FINANCIAL ECONOMICS
16
Financial decisions of households

✓Consumption and saving decisions

✓Investment decisions
✓Financing decisions
✓Risk-management decisions
 1. FINANCIAL ECONOMICS
17
Financial decisions of firms

✓Strategic planning and capital budget decisions.

- What businesses to be in
- Identifying ideas for new investment projects
- Evaluating the projects, and deciding which ones to undertake
- Implementing them, a plan for acquiring assets and for training
the personnel.
 1. FINANCIAL ECONOMICS
18 Financial decisions of firms

✓Financing (capital structure) decisions

- A feasible financing plan
- The decisions about how much debt and equity to have
- Wide range of financial instruments and claims
- A corporation’s capital structure determines who gets what
shares of its cash flows, and partially determines who gets to
control the company.

✓Working capital management decisions

- The day-to-day prosaic financial affairs of the business
 1. FINANCIAL ECONOMICS
19 Forms of business organization
 1. FINANCIAL ECONOMICS
20 Forms of business organization

• According to the Law on Enterprise 2020:

✓ Công ty TNHH Một thành viên (Single-member limited liability comanies)
✓ Công ty TNHH Hai thành viên (Two-members limited liability companies)
✓ Công ty TNHH Hai thành viên trở lên (Multi-members limited liability
companies)
✓ Công ty Cổ phần (Joint stock companies)
✓ Công ty hợp danh (Partnerships, Joint Venture)
 1. FINANCIAL ECONOMICS
21 Separation of ownership and management

✓The owners of a firm delegate the responsibility of running the

business to professional managers who may not own any shares.
✓Why? What? How?
 1. FINANCIAL ECONOMICS
22
Separation of ownership and management

✓Reasons ???
- Superior ability of managers to run the business.
- The resources of many households may have to be pooled to
achieve the efficient scale of a business.
- To achieve efficient diversifications in the investors’ portfolio of
assets.
- The separated structure allows for savings in the costs of
information gathering.
- “Learning curve” or “going concern” effect favors the separated
structure.
 1. FINANCIAL ECONOMICS
23
Conflict of interest

✓The separated structure creates the potential for a conflict of interest

between the owners and the managers.
✓An agency problem exists where the principal has to entrust their
interests to an agent who acts on their behalf.
✓Contractual agreements, incentive schemes, and monitoring are used
to control principal-agency conflicts.
1. FINANCIAL ECONOMICS - CONFLICT OF INTEREST
 1. FINANCIAL ECONOMICS
25
Conflict of interest
 1. FINANCIAL ECONOMICS
The roles of corporate financial specialists
Board of Directors

Chairman of the Board and

Chief Executive Officer (CEO)

President and Chief

Operating Officer (COO)

Vice President and

Chief Financial Officer (CFO)

Treasurer Controller

Cash Manager Credit Manager Tax Manager Cost Accounting

Capital Expenditures Financial Planning Financial Accounting Data Processing

 1. Financial Economics
The roles of corporate financial specialists

Chief Financial Officer

www.vietnamworks.com
Jobstreet.com.sg

Treasurer Controller
Short term cash management, currency Internal accounting systems, financial
trading, financing transactions, bank statements, tax returns.
relationships
 1. FINANCIAL ECONOMICS
The roles of corporate financial specialists

(2) (1)

Firm's Financial Financial

(4a)
operations manager markets

(3) (4b)

(1) Cash raised from investors

(2) Cash invested in firm
(3) Cash generated by operations
(4a) Cash reinvested
(4b) Cash returned to investors
 2. FINANCIAL MARKET
29 What is the financial system

✓The separated structure creates the potential for a conflict of interest

between the owners and the managers.
✓An agency problem exists where the principal has to entrust their
interests to an agent who acts on their behalf.
✓Contractual agreements, incentive schemes, and monitoring are used
to control principal-agency conflicts.
2. FINANCIAL MARKET
Financial market
2. FINANCIAL MARKET - FINANCIAL MARKET
 2. FINANCIAL MARKET - STOCK MARKET

What
Is the
Stock
Excha
nge?
 2. Financial market
Vietnamese stock market

HOSE

HNX UPCOM
 2. Financial market
Vietnamese stock market

✓ The Ho Chi Minh City Stock Exchange (HOSE) is the largest and most
prominent stock exchange in Vietnam, established in 2000 with 2 listed
companies.
✓ HOSE is owned by the Ministry of Finance and regulated by the State
Securities Commission.
✓ 533 listed stocks, including 404 companies, 3 closed-end fund certificates,
8 ETFs, 113 covered warrants and 5 bonds.
✓ Total market cap VND 5.8 million billion, accounted for 92.77% GDP in
2020.
 2. Financial market
Vietnamese stock market

✓ Hanoi stock exchange (HNX) was established in accordance with Decision

No.01/2009/QĐ-TTg by the Prime Minister on the basis of transforming and
restructuring the Hanoi Securities Trading Center which was established upon Decision
No. 127/1998/QĐ-TTg and came into operation on 08/03/2005.
✓ 348 listed stocks
 2. Financial market
Vietnamese stock market

✓ UPCoM (Unlisted Public Company Market): the market at HNX for

public companies not listed yet and was launched in June 2009 with
10 initial companies.
✓ 906 companies are listed on UPCoM as of December 2020, with a
market capitalization of USD 77.5 billion.
✓ Stocks delisted from HOSE or HNX or suspended due to losses will be
moved to UPCoM for trading.
 2. Financial market
Vietnamese stock market
 2. Financial market
Vietnamese stock market

STOCK INDICES
• VN INDEX
• VN30 INDEX
• HNX30 INDEX
• UPCOM INDEX
• INDUSTRIAL INDICES
 2. Financial market
Vietnamese stock market
INDUSTRY CLASSIFICATION - GICS®
 2. Financial market
Vietnamese stock market

INDUSTRY CLASSIFICATION
• SIC (Standard Industrial Classification) with 10 groups
• NAICS (The North American Industry Classification System) with 20 groups
• SIC (UK) with 21 groups.
• METI (Japan) with 5 groups.
• ICB (Industry Classification Benchmark) by Dow Jones and FTSE
International Limited (NASDAQ, NYSE)
• TRBC (Thomson Reuters Business Classification – TRBC) by Thomson
Reuters with 10 groups.
 2. FINANCIAL MARKET
41 Financial market rates

✓Interest rate

✓Rates of return on risky assets

✓Market indexes and market indexing

✓Rates of return in historical perspective

✓Inflation and real interest rates

✓Interest rate equalization

 2. FINANCIAL MARKET
42 Financial intermediaries

✓Banks
✓Other depository savings institutions
✓Insurance companies
✓Pension and retirement funds
✓Mutual funds
✓Investment banks
✓Venture capital firms
✓Assets management firms
✓Information services
43
WORK TO DO

✓Tự tìm hiểu một phần lý thuyết

theo yêu cầu của bài tập về nhà.

✓Đọc Bodie et al. (2012)- Chương

7+8+9