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Intro & FS Overview
Intro & FS Overview
INTRODUCTION
WHY FINANCE?
Finance is NOT about money
Finance is about VALUE! Almost everything can be valued! The value doesn’t
come from money only!
Value creation has two main aspects:
Time
Uncertainty
FINANCE:
Set of tools
Way of thinking! (makes all your decisions more rational)
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HOW DOES THE LEARNING HAPPENS?
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TECHNICAL DETAILS
Prerequisites Reading
Economics
Corporate finance, Berk, J., DeMarzo, P.
Maths & Statistics
Financial institutions management : a
Accounting risk management approach, Saunders,
A., Cornett, M. M.
Desire to learn
Financial markets and institutions,
Mishkin, F. S., Eakins, S. G.
Grade
Classwork 10% Team
HAs 30% Irina Dergunova
(ivdergunova@gmail.com)
Quizes 20%
Veronika Chistotinova 6
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FINANCIAL SYSTEM – A BIRD’S EYE VIEW
?
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FUNCTIONS OF THE FINANCIAL SYSTEM
securities
- financial claims
Suppliers of funds on the issuers’ Users of funds
future income
or assets
loans
deposits
- economic agents specialized in
- Indirect Financial intermediaries trading financial contracts (e.g.
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- Direct loans) and or securities
FINANCIAL MARKETS (1/4)
The NATURE of financial securities traded
Primary Secondary
New issues of securities are sold to initial Securities that have been previously issued
buyers are resold
Facilitates new financing to corporations Provide liquidity to the financial asset and to
and government assist in determining prices for subsequent
issues
Main players – investment banks, thus
markets are not well known to the public Set the price of the securities based on
similar instruments traded
NASDAQ, NYSE, LSE, AMEX
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FINANCIAL MARKETS (2/4)
The MATURITY of financial securities traded
Money Capital
Short-term debt instruments with maturity Instruments with maturities of 1 year or more:
less than 1 year: Long – term debt
Overnight interbank loans Stocks
Commercial paper
Main players:
Repo and reverse repo transactions
Pension funds & insurance companies
Main players:
Market is less liquid, more volatile
Corporations and banks seeking to earn
interest on short – term surplus funds
Market is more liquid, less volatile 12
FINANCIAL MARKETS (3/4)
The FORMS of organization
Exchanges Over-the-counter (OTC) markets
Buyers and sellers (through their brokers) meet in Dealers at different locations have an inventory
one central location to conduct sales of securities, and are ready to buy or sell these
securities to anyone who accepts their price
Strict requirements for listing
OTC markets are less transparent and regulated
Special institutions that organize trading. Provide
a set of institutional rules that govern trading and A large fraction of bond and derivatives trading is
informational flows regarding that trading. This still done on OTC markets
type of exchange centralizes the communication
Many wholesale funding markets such as the
of bid and ask prices to all direct market
interbank market are OTC
participants .
US government bond market, OTC Markets Group
NYSE, LSE
https://www.youtube.com/watch?v=it5G8rZtT1k&
https://www.nyse.com/why-nyse
feature=youtu.be 13
FINANCIAL MARKETS (4/4)
FORMS of trade intermediation
Quote-driven Order-driven Brokered
A dealer or market-maker Buyers and sellers trade Brokers perform a search
is on one side of every directly without role
trade intermediation
They hold no inventories,
Dealers hold an inventory Buyers and sellers can as they don’t participate
of securities place various types of in the trade themselves
orders in the order book
Dealers charge the Bid- Brokers try to match
Ask spread Various rules formalize the buyers and sellers
trading process
Dealers also receive
commission on trades
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FINANCIAL INSTRUMENTS/ SECURITIES
Equity represents claims to shares of the net income and assets of a firm
No maturity
The payment of dividends is a discretionary decision of the firm: (no fixed schedule
and no fixed amount)
Equity holders are residual claimants to the firm (they get paid after debt holders)
Equity claims are riskier than debt instruments
Equity holders have ownership of the firm
Equity holders can benefit from the increase in value of the firm
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TAXONOMY OF FINANCIAL INTERMEDIARIES
1.Depository institutions
3.Investment Intermediaries
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1. DEPOSITORY INSTITUTIONS
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3. INVESTMENT INTERMEDIARIES
Other intermediaries:
Finance companies: (e.g. GE Capital, Ford Motor Credit)
Offer sales financing, personal credit, and / or leasing
Do not take deposits
Raise funds by issuing short-term commercial paper and other longer-term debt on wholesale markets
Private equity firms: (e.g. KKR)
Pool resources from institutions and wealthy individuals
Buy the equity of privately owned firms, or take publicly traded firms out of the market
Often use leverage
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Thank you!
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