Economics: Difference between revisions
→Week 39 - International finance overview: + adding notes for week 39
(→Week 39 - International finance overview: Today's notes are at https://en.wikipedia.org/wiki/User:Juxo/Sandbox2 for now. I will move them here shortly) |
(→Week 39 - International finance overview: + adding notes for week 39) |
||
| Line 235: | Line 235: | ||
== Week 39 - International finance overview == | == Week 39 - International finance overview == | ||
== Week 39 - Finance == | |||
'''[[w:Finance|Finance]]''' is the science of funds management, or the allocation of [[w:assets|assets]] and liabilities over time under conditions of certainty and uncertainty. A key point in finance is the [[w:time value of money|time value of money]], which states that a unit of currency today is worth more than the same unit of currency tomorrow. Finance aims to price assets based on their risk level, and expected rate of return. Finance can be broken into three different sub categories: [[w:public finance|public finance]], [[w:corporate finance|corporate finance]] and [[w:personal finance|personal finance]]. ( Wikipedia ) | |||
What financial managers do? | |||
* '''[[w:Treasurer|Treasurer]]''': [[w:company|company]] – [[w:markets|markets]], external | |||
* '''[[w:Controller|Controller]] / [[w:comptroller|comptroller]]''': [[w:business unit|business unit]]s, internal | |||
* Others: [[w:Credit manager|Credit manager]], [[w:cash management|cash management]], [[w:risk management|risk management]], insurance management | |||
* '''[[w:Markets|Markets]]''' | |||
::* '''[[w:money market|money market]]''': < 1 year | |||
::* '''[[w:capital market|capital market]]''': > 1 year | |||
Price of money: '''[[w:Interest rate|Interest rate]]''' + '''[[w:Margin (finance)|bank margin|]]''' | |||
=== Markets in Financial Instruments Directive (MiFID) === | |||
'''[[w:Markets in Financial Instruments Directive|Markets in Financial Instruments Directive]]''' ('''MiFID''') | |||
=== Financial analysis === | |||
* '''[[w:Financial analysis|Financial analysis]]''' (also referred to as '''financial statement analysis''' or '''accounting analysis''' or '''Analysis of finance''') refers to an assessment of the viability, stability and profitability of a [[w:business|business]], sub-business or [[w:project|project]]. ( Wikipedia ) | |||
:* '''[[w:balance sheet|balance sheet]]''', '''[[w:income statement|profit and loss account]]''' | |||
::* horizontal: trend over the years | |||
::* vertical: internal structure of balance sheet or income statement | |||
:* '''[[w:ratio|ratio]] [[w:Analysis#Business|analysis]]''': [[w:liquidity|liquidity]], [[w:activity|activity]], [[w:leverage|leverage]], [[w:profitability|profitability]], [[w:market value|market value]] | |||
Why? because markets make valuations based on financial analysis. | |||
* '''[[w:Financial forecast|Financial forecast]]ing''', '''[[w:budget|budget]]ing''' | |||
:* '''[[w:sales|sales]]''', '''[[w:production|production]]''', '''[[w:inventory|inventory]]''', '''[[w:materials|materials]]''', '''[[w:labor|labor]]''', '''[[w:factory overhead|factory overhead]]''', '''[[w:selling|selling]]''' and '''[[w:administrative|administrative]] [[w:expense|expense]]s''' -> '''[[w:pro forma|pro forma]]''' '''[[w:income statement|income statement]]''' | |||
:* '''financial budget''': '''[[w:cash|cash]] budget''', '''pro forma [[w:balance sheet|balance sheet]]''' | |||
=== Balance sheet items === | |||
:* '''[[w:working capital|working capital]]''' == '''[[w:current asset|current asset]]s''' ~ what you have (liquid) | |||
:* '''current assets''' == '''[[w:cash|cash]]''', '''[[w:accounts receivable|accounts receivable]]''', '''[[w:inventory|inventory]]''' | |||
:* '''[[w:total assets|total assets]]''' == current assets (fairly liquid) + '''[[w:capital assets|capital assets]]''' ([[w:machine|machine]]s, [[w:equipment|equipment]], not liquid) | |||
:* '''[[w:Liability (financial accounting)|Liabilities|]]''': | |||
::** [[w:current liability|current|]] (short term) | |||
::** [[w:Long-term liabilities|long-term|]], [[w:stockholder|stockholder]]s [[w:equity (finance)|equity|]] | |||
:* '''[[w:Current liabilities|Current liabilities]]''' ~ what you owe (short term) | |||
:* '''[[w:Trade credit|Trade credit]]''' == '''[[w:accounts payable|accounts payable]]''' | |||
:* '''[[w:Bank|Bank]] [[w:loan|loan]]'''s | |||
:* '''Bankers’ acceptances''' | |||
:* '''[[w:commercial|commercial]] [[w:finance company|finance company]]''' loans | |||
:* '''[[w:commercial paper|commercial paper]]''' | |||
:* '''[[w:receivable|receivable]] [[w:financing|financing]]''' | |||
:* '''[[w:inventory|inventory]] financing''' | |||
* '''[[w:Time value of money|Time value of money]]''': especially when long-term financing, -> [[w:interest|interest]] | |||
:* '''[[w:future value|future value]]s ([[w:compounding|compounding]])''' | |||
:* '''[[w:present value|present value]]s ([[w:discounting|discounting]])''' | |||
=== Risk, return and valuation === | |||
* '''[[w:Risk|Risk]]''', '''[[w:return|return]]''' and '''[[w:valuation|valuation]]''' | |||
*'''[[w:probability|probability]],''' “expected” | |||
* measuring: '''[[w:standard deviation|standard deviation]]''' | |||
* '''[[w:business risk|business risk]]''', '''[[w:liquidity risk|liquidity risk]]''', '''[[w:default risk|default risk]]''', '''[[w:market risk|market risk]]''', '''[[w:interest rate risk|interest rate risk]]''', '''[[w:purchasing power|purchasing power]] risk''' (inflation) | |||
Risk of a '''[[w:Portfolio (finance)|portfolio|]]''' (combination of several items) | |||
* portfolio return, risk: correlation | |||
* '''[[w:Diversification (finance)|diversifiable]] [[w:risk|risk]]''' (using correlation information) + nondiversifiable risk (not unique to a given security) | |||
* business, liquidity, default: diversifiable | |||
* market, interest rate, inflation: nondiversifiable | |||
* [[w:Capital asset pricing model|Capital asset pricing model]] (CAPM), APM | |||
=== Bond and stock valuation === | |||
[[w:bond valuation|Bond]] and [[w:stock valuation|stock valuation]] | |||
* bond: [[w:present value|present value]] of [[w:periodical|periodical]] [[w:interest|interest]] [[w:payment|payment]]s + [[w:principal|principal]] | |||
* stock: present value of periodical [[w:dividend|dividend]]s | |||
* what is the [[w:discount rate|discounting rate]]? [[w:interest rate|interest rate]]? [[w:rate of return|rate of return]]? | |||
=== Capital budgeting, long-term financial decisions === | |||
[[w:Capital budgeting|Capital budgeting]], [[w:long-term|long-term]] [[w:financial|financial]] [[w:decision|decision]]s | |||
* discounting | |||
'''[[w:Cash flow forecasting|Cash flow forecasting]]''' or '''cash flow management''' is a key aspect of [[w:Finance|financial management]] of a business, planning its future cash requirements to avoid a crisis of [[w:liquidity|liquidity]]. ( Wikipedia ) | |||
* measuring (planning, guessing) cash flows: future! | |||
* [[w:payback period|payback period]], [[w:NPV|NPV]], [[w:IRR|IRR]], [[w:profitability index|profitability index]] | |||
* mutually exclusive investments | |||
* [[w:lease|lease]]-[[w:purchase|purchase]] decision | |||
* capital budgeting and inflation | |||
Capital budgeting under risk | |||
* [[w:probability distribution|probability distribution]]s, [[w:Risk-adjusted return on capital|risk-adjusted]] [[w:discount rate|discount rate]], [[w:certainty equivalent|certainty equivalent]], [[w:simulation|simulation]], [[w:sensitivity analysis|sensitivity analysis]], [[w:probability tree|probability tree]]s | |||
'''Cost of capital?''' | |||
* [[w:cost of debt|cost of debt]] | |||
* [[w:cost of equity|cost of equity]] capital | |||
'''[[w:Leverage|Leverage]] and [[w:capital structure|capital structure]]''' | |||
* leverage? since [[w:fixed costs|fixed costs]] | |||
* '''[[w:break-even analysis|break-even analysis]]'''' | |||
does capital structure matter? | |||
=== International finance === | |||
==== The world of international finance ==== | |||
* '''[[w:Timeline of international trade|growth]] of [[w:international trade|international trade]] versus [[w:domestic trade|domestic trade]] | |||
* '''increased [[w:globalization|globalization]] of [[w:financial market|financial]] and real-asset markets | |||
* '''increased [[w:volatility|volatility]] of [[w:exchange rate|exchange rate]]s | |||
* increased importance of '''[[w:multinational corporations|multinational corporations]]''' and [[w:transnational|transnational]] [[w:alliance|alliance]]s | |||
* The [[w:market|market]]s for [[w:foreign exchange|foreign exchange]] | |||
==== An introduction to exchange rates ==== | |||
* '''[[w:spot market|spot]] [[w:foreign exchange market|foreign exchange market]]''' | |||
* '''direct versus indirect [[w:exchange|exchange]] and cross '''[[w:exchange rate|exchange rate]]'''s | |||
==== Forward market ==== | |||
* '''[[w:forward exchange|forward exchange]]''' '''[[w:premium|premium]]s''' and '''[[w:discount|discount]]'''s | |||
* '''[[w:forward rate|forward rate]]'''s versus expected '''[[w:future|future]] [[w:spot rate|spot rate]]'''s | |||
* '''[[w:flexibility|flexibility]]''' of '''[[w:forward exchange|forward exchange]]''' | |||
* '''[[w:forward|forward]] [[w:Financial quote|quotation|]]s''' | |||
==== Currency futures and options markets ==== | |||
* '''[[w:currency future|currency future]]''' | |||
* '''[[w:futures contract|futures contract]]s''' versus '''[[w:forward contract|forward contract]]s''' | |||
::** A '''futures contract''' (more colloquially, '''futures''') is a '''''standardized''''' [[w:contract|contract]] between two parties to buy or sell a specified asset of standardized quantity and quality for a price agreed upon today (the ''futures price'' or [[w:strike price|strike price]]) with delivery and payment occurring at a specified future date, the ''delivery date''. ( Wikipedia ) | |||
::** A '''forward contract''' or simply a '''forward''' is a '''''non-standardized contract''''' between two parties to buy or to sell an asset at a specified future time at a price agreed upon today. ( Wikipedia ) | |||
* '''[[w:currency option|currency option]]s''' | |||
== Week 40 - Exchange rate determination == | == Week 40 - Exchange rate determination == | ||