This document is a summary of all slides from all lectures given. Unit 11, which is about the financial crisis of 2008, is in another document of mine called 'Panic Summary'. Unit 8 is not included either. These are the exercises that are fully explained in the slides. (This might seem a rather sho...
Contents
U1: The financial system
U2: Money and bond analytics
U3: Money and bond markets
U4: Equity markets
U5: Risk and return
U6: Derivatives - futures
U7: Derivatives - options
U8: Exercises
U9: Financial intermediation
U10: Commercial and investment banking
U11: The financial crisis of 2008
U12: Regulation and supervision
,U1: The financial system
1. The actors
Haves = lenders: possess capital + can lend it out, excess of money
<-> Havenots = borrowers: needs > money, shortage -> have to raise capital
Þ Idea: put excess in good use -> give to havenots (in)direct
Þ Not review individually, but macro-economic perspective
- Corporates: havenot: work with shareholder’s money
- The government: havenot
- Households: crucial haves: have all the money
- The financial industry: netto zero wealth: everything that comes in, goes out
- Rest of the world: depends
Households
Net wealth = assets – liabilities
o Assets = possession that has value in an exchange transaction
- Tangible assets= real assets: value from physical character/utility
- Intangible assets: value from legal claim to future benefit
- Financial assets: intangible assets with claim to future cash
USA: financial > real, India: financial < real, Bel: financial < real but ong same
Asset classes: traditional (common stock, bonds, cash), all kinds of cash instruments
<-> Alternative
• Real estate: financialized, just buy certificate portfolio -> cash flow = rents these buildings
deliver
• Commodities: volatile = dangerous
• Private equity: into start-ups
• Hedge funds: for wealthy/institutional investors
• Venture capital
• Currencies
The Actors
Liabilities = debt
Theo Household Balance Sheet
à Household balance sheet: overview assets/liabilities single household
Real assets
<-> Financial: stocks = receipt for participation in
company
o Bonds: kind of loan
o Mutual funds: portfolio of stocks/bonds
o Deposits: money on the bank
<-> Liabilities: mortgage loan = collateral
o Consumer loans: spread payment for car/tv/
Prof. Dr. M. De Ceuster Introduction to Financial Markets
Growth derives in net wealth
• Value changes in asset/liabilities fe rising stocks
=> growth from good investments
=> wealth = relative = dynamic
, • Net-income from labour/capital/transfers (pension, social security, …)
• Inheritances, gifts
Wealth creation
“Assets put money in your pocket, whether you work or not, and liabilities take money from your
pocket.” Robert Kiyosaki
- Poor family: no liabilities -> spend everything earned on basic necessities
- Middle class: poor families with home
Buy house with leftover money + loan -> long mortgage
- Rich family: real assets which generate income on their own
Stress on collecting items!
=> Wealth not uniformly distributed: rich North America <-> very poor Americans
=> Global wealth pyramids: focus on top, on billionaires -> more possibilities/challenges
=> Table wealth inequality developed countries <-> emerging markets
! SO: households = ultimate owners of all assets in economy = bearers of risk within financial system
Behind every corporate are individuals (inequality between these)
2. Balance sheets of other actors
- Everyone interconnected
Problem
How crisis
do the Balance 2008:
Sheets of people
Other Actors Look Like?didn’t get bigger picture
- Importance government debt: people invest in government: almost risk free -> get interest
Corporates
Corporates
Equity: claim from shareholders, profits increase
shareholder’s wealth
Debt: people want invested money back, have no
say in company
= everything company loans + interest
Trade credit: delayed payment
Importance of ratio: people like to work with
borrowed money -> hope that cost of loan < profit
Fixed assets: LT commitment
Financial: shares in other company -> °groups
=> Leverage: controlling much more with little
money
-> Gearing: companies funded
Prof. Dr. M. De Ceuster Introduction towith
Financial Markets
o Shareholder funds: original equity, right issues, retained profit
, o Debt: use of leverage to raise ROE above ROA
ROE = return on investment, profit/equity -> interesting for shareholders: how much earned with
invested money?
ROA = return on assets, profit/assets -> return on all money used
-> Leverage: measured as
o Debt/equity ratio: gearing ratio = ratio between LTdebt/equity
Net gearing ratio: ratio financial debt/equity
<-> Net financial debt: LTdebt + STdebt – cash – ST financial assets
Bv. 2: €2 debt for every €1 of equity
=> important to define ratios before using!
o Assets/equity ratio: leverage multiplier (LM)
How do the Balance Sheets of Other Actors Look Like?
ROE = ROA X LM
Banks: low ROA -> need lots of leverage to boost ROE
Financial Sector - Bank
Financial sector: bank
Leverage companies: 30 equity, 70 debt
<-> Banks: much more leverage (high debt): take
money from someone -> lend out
• Ur deposits: assets for u, liability for bank (have
to give it back)
Trading book: assets banks have for trading, need
inventory of shares, hold portfolios
How do the Balance Sheets of Other Actors Look Like? => no intention to keep T, just for customer service
Banking book: real banking service = granting loans
Financial Sector - Mutual Fund => interstraight business: transform deposit in
something with higher return fe in government
Financial sector: mutual fund
Prof.
How doDr.the
M. Balance
De Ceuster Introduction
Sheets of Other Actors to Financial Markets
Look Like?
Portfolio manager
who gathers funds: gives u
certificate -> they invest
Financial Sector - Insurance => let someone else buy things for u: pass-through
Company
Financial sector: insurance company
Do 2 things:
- Casualty insurance: cover insured activities, reimburse
- Invest for you: u get back when u die/end contract
Technical provision: estimate contractual obligations ->
Prof. Dr. M. De Ceuster Introduction to Financial Markets invest that to25 /repay
40 contracts, to cover losses
Government
• Liabilities: government debt
• Assets: few, some buildings, stakes in banks, …
Huge debt + hardly assets => negative equity = only entity who can survive this
BUT no problem: families own everything, are wealthy enough for government to raise taxes to pay
Prof. Dr. off
M. Dedebt
Ceuster Introduction to Financial Markets
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller studentHI2. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $9.06. You're not tied to anything after your purchase.
