FA 2013 AFIM Lec 01 Hondouts.pdf

download FA 2013 AFIM Lec 01 Hondouts.pdf

of 13

Transcript of FA 2013 AFIM Lec 01 Hondouts.pdf

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    1/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 1

    Fall 2 13ADVANCED FINANCIAL INSTRUMENTS AND MARKETS

    LectureNo.01

    Government

    Hammad Hassan MirzaAssistantProfessor(Finance)

    DepartmentofBusinessAdministration

    UniversityofSargodha

    Simultaneously Philosophical and Practicalunderpinnings

    Banking, Insurance, Securities, Derivatives, Financial

    CourseIntroduction

    .

    International Bias but will try best to relate.

    Course is more theoretical but cannot avoidmathematics/statistics completely.

    Problem Sets/case studies/Quiz etc.

    2PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    Onsuccessfulcompletionofthismodule,youareexpectedto:

    1. Gainsomeknowledgeofthemainfunctionsoffinancialmarketsandinstitutions

    CourseObjectives

    .

    capitalmarkets

    and

    Instruments

    of

    Risk

    Management

    3. Understandthenatureoffinancialinstrumentsandthereasonsforinnovatingsuchinstruments

    4 . Beawareoftherelevantempiricalcapitalmarketsresearch

    5. Becomefamiliarwiththekeyresearchmethodsusedinthefinancialmarketsliterature

    3PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    2/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 2

    Lecturefordisseminatingkeyconcepts

    Discussionon racticalissues

    TeachingMethodology

    AssignmentsandPresentations/Projects

    Quiz/CaseStudies

    4PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    IndividualClassPresentations/Projects

    RegularClassPresentations/Participation(7%)20%

    Evaluation

    TermPaper/Assignment(8%)ClassQuiz/CaseStudies(5%)MidTermTest (45Minutes) 20%

    FinalExamination(2hours) 60%

    100%

    5PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    1. Fabozzi, Frank J., Franco Modigliani, Frank J. Jones, and Michael G.Ferri.Foundations of Financial Markets and Institutions, 4th ed. PrenticeHall, 2010.

    2. FS Mishkin, SG Eakins. Financial Markets and Institutions 5th Edition.PearsonPublications

    RecommendedText

    3. John C. Hull,Options, Futures and Other Derivatives, 6 t Edition, PrenticeHall.

    4. Frank J. Fabozzi:Bond Market Analysis and Strategies, Prentice Hall.

    5. Szymon Borak Wolfgang Karl Hrdle Brenda Lpez Cabrera,Statistics ofFinancial Markets, Springer Heidelberg Dordrecht LondonNew York

    6. Robert Dubil,An Arbitrage Guide to Financial Markets,2004 , John Wiley &SonsLtd

    7. RelevantResearch Articles (Downloadable from www.financecottage.com)

    6PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    3/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 3

    1. FinancialInstitutionsandRoleofGovt.

    2. RiskandFinancialcrisis

    3. TechnologyandInventioninFinance

    CourseContents(MidTerm)

    4. PortfolioDiversificationandSupportingFinancialInst.

    5. DeterminantsofAssetPricesandInterestRates

    6. OrganizationandStructureofMarkets

    7. MarketforGovernmentandCorporateSecurities

    8. MortgageandSecuritizedAssetMarkets

    9. MarketDerivativeSecurities7

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    1. CollateralPresentValueandVocabularyofFinance

    2. MechanicsofFutureMarkets

    3. HedgingStrategiesusingfutures

    CourseContents(FinalTerm)

    4. InterestratesandDeterminantsofForwardandFutureprices

    5. MechanicsofOptionMarkets

    6. Insurance:ThearchetypicalRiskManagementInstitution

    7. FinancialInstrumentsandMajorWorldFinancialCrisis

    8PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    TodaysSession

    9PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    4/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 4

    Why Finance

    WallStreetCrash1 2

    SessionI

    JapaneseAssetPriceBubble

    AsianFinancialCrisis

    ImportanceofFinancialMarkets

    BasicFinancialInstruments

    10PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    The Wall Street Crash of 1929, also known astheBlack Tuesday and theStock Market Crash of1929, began in late October 1929 and was the mostdevastating stock market crash in the history ofthe United States, when taking into consideration

    WallStreetCrashof1929

    the full extent and duration of its fallout. The crashsignaled the beginning of the 10year GreatDepression that affected all Western industrializedcountriesand did not end in the United States untilthe onset of American mobilization for World WarII at the end of 1941. 15 million people hadunemployment coming to them after the bankscrashed.

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    11

    The Japanese asset price bubble was an economicbubble in Japan from 1986 to 1991, in which real

    '

    Japaneseassetpricebubble1986

    .

    subsequent collapse lasted for more than a decade withstock prices initially bottoming in 2003, although they woulddescend even further amidst the global crisis in 2008. TheJapanese asset price bubble contributed to what some referto as the Lost Decade. Some economists, such as PaulKrugman, have argued that Japan fell into a liquiditytrap during these years.

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    12

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    5/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 5

    The Asian financial crisis was a period of financialcrisis that gripped much of Asia beginning in July1997, and raised fears of a worldwide economic

    AsianFinancialCrisis1997

    meltdown due to financial contagion. The crisisstarted in Thailand with the financial collapse ofthe Thai baht after the Thai government was forcedto float the baht (due to lack of foreign currency tosupport its fixed exchange rate), cutting its peg tothe U.S. dollar, after exhaustive efforts to support itin the face of a severe financial overextension thatwas in part real estate driven.

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    13

    The U.S.subprime mortgage crisis was a set of events andconditions that led to the late2000s financial crisis,

    USSubprimeMortgage

    characterized by a rise in subprime mortgagedelinquencies and foreclosures, and the resulting declineof securities backed by said mortgages. Several majorfinancial institutions collapsed in September 2008, withsignificant disruption in the flow of credit to businessesand consumers and the onset of a severe global recession.

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    14

    Financial markets, such as bond and stock markets, arecrucial in our economy.

    These markets channel funds from savers to investors,

    ImportanceofFinancialMarkets

    thereby promoting economic efficiency. Market activity affects personal wealth, the behavior of

    business firms, and economy as a whole

    Debt markets, or bond markets, allow governments,corporations, and individuals to borrow to financeactivities.

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    15

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    6/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 6

    The stock market is the market where common stock(or just stock), representing ownership in a company,are traded.

    Companies initially sell stock (in the primary market)

    ImportanceofFinancialMarkets

    to raise money. But after that, the stock is tradedamong investors (secondary market).

    The foreign exchange market is where internationalcurrencies trade and exchange rates are set.

    Although most people know little about this market,it has a daily volume around $1 trillion!

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    16

    PakistanMarketIndicators20072013

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    17

    1. PKR/USD2. KSE100Index3. InterestRate(SBOP)4. InflationRate5. PakGovt.BondYeild

    DesignofFinancialMarkets

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    18

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    7/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 7

    I tsyourTurn..

    BasicFinancialInstruments

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    19

    Introduction

    FinancialAssets

    FinancialMarkets

    SessionII

    GlobalizationandFinancialMarkets

    DerivativeMarkets

    RoleofFinancialIntermediaries

    OverviewofAsset/LiabilityManagement forFIs

    RoleofGovernment

    20PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    ProductVSFactorMarket

    FinancialMarketandFinancialAssets

    FinancialAssets,FinancialInstruments,Securities

    Introduction

    DebtVS

    Equity

    Instruments

    PricingPrinciplesofFinancialAssets

    RoleofFinancialAsset

    TransferofFundsfromSurplustoDeficitunits

    Redistributionofunavoidablerisk

    21PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    8/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 8

    RoleofFinancialMarkets

    PriceDiscoveryProcess

    OfferingLiquidity

    FinancialMarkets

    ReductionofSearch/InformationCost

    ClassificationofFinancialMarkets

    PrimaryVsSecondary(Seasoningof Claim)

    MoneyVsCapital(Maturity)

    DebtVsEquity(NatureofClaim)

    CashVsDerivative(Delivery/SettlementofClaim)

    OrganizedVsOTC(Structure)22

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    The factorsthathaveledtotheintegrationofFinancialMarkets

    GlobalizationofFinancialMarkets

    Deregulation/Liberalization

    TechnologicalAdvancesformonitoring/executing.

    IncreasedInstitutionalizationofFinancialMarkets

    23PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    FunctionsperformedbyFinancialInstitutions

    FinancialIntermediation

    FinancialInstitutions

    Exchangeof

    financial

    assets

    on

    behalf

    of

    customers

    Exchangeoffinancialassetsontheirownaccount

    Assistingincreationoffinancialassets

    Providinginvestmentadvice

    Managementofportfolios

    24PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    9/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 9

    CommercialBanks

    Savin andloanassociation

    FinancialIntermediaries

    SavingBanks

    Insurancecompanies

    Pensionfunds

    CaptiveFinanceCompanies??

    25PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    DirectandIndirectInvestments

    Maturit Intermediation

    RoleofFinancialIntermediaries

    RiskDiversification

    CostReduction

    PaymentMechanism

    26PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    NatureofLiabilities

    Theamountandtimingofthecashoutlaysthatmustbemadetosatisfythecontractualtermsoftheobligationissued Li uidit Concerns

    AssetLiabilityManagementofFinancialInstitutions

    .

    TYPEOFLIABILITY AMOUNT

    OF

    CASH

    OUTLAYTIMING

    OF

    CASH

    OUTLAY

    Type I Known Known

    Type II Known Uncertain

    Type III Uncertain Known

    Type IV U nc ert ain U nce rt ai n

    27PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    10/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 10

    PrimaryAssetsandLiabilitiesofFIs

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    28

    StopMarketFailure?

    MainReasonsforRegulation1. IncreaseInformation toInvestors

    Decreasesadverseselectionandmoralhazardproblems

    RoleofGovernmentinFinancialMarkets

    SECforcescorporationstodiscloseinformation

    2. EnsuringtheSoundnessofFinancial Intermediaries Preventsfinancialpanics

    Chartering,reportingrequirements,restrictionsonassetsandactivities,depositinsurance,andanticompetitivemeasures

    3. ImprovingMonetaryControl Reserverequirements

    29PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    Toprotectthepublicandtheeconomyfromfinancialpanics,thegovernmenthasimplementedsixtypesofregulations:

    RestrictionsonEntry

    RegulationReason:EnsureSoundnessofFinancialIntermediaries(cont.)

    Disclosure

    RestrictionsonAssetsandActivities

    DepositInsurance

    LimitsonCompetition

    RestrictionsonInterestRates

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    30

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    11/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 11

    RestrictionsonEntryRegulatorshavecreatedverytightregulationsastowho

    isallowedtosetupafinancialintermediary

    Regulation:RestrictiononEntry

    financialintermediary,suchasabankoraninsurancecompany,mustobtainacharterfromthestateorthefederalgovernment

    Onlyiftheyareupstandingcitizenswithimpeccablecredentialsandalargeamountofinitialfundswilltheybegivenacharter.

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    31

    DisclosureRequirements

    Therearestringentreportingrequirementsfor

    Regulation:Disclosure

    Theirbookkeepingmustfollowcertainstrictprinciples,

    Theirbooksaresubjecttoperiodicinspection,

    Theymustmakecertaininformationavailabletothepublic.

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    32

    Restrictionsontheactivitiesandassetsofintermediarieshelpstoensuredepositorsthattheirfundsaresafeandthatthebankorotherfinancialintermediarywillbeableto

    Regulation:RestrictiononAssetsandActivities

    .

    Intermediaryare

    restricted

    from

    certain

    risky

    activities

    And fromholdingcertainriskyassets,oratleastfromholdingagreaterquantityoftheseriskyassetsthanisprudent

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    33

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    12/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 12

    The government can insure people depositors to afinancial intermediary from any financial loss if the

    Regulation:DepositInsurance

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    34

    Althoughtheevidencethatunbridledcompetitionamongfinancialintermediariespromotesfailuresthat

    Regulation:LimitsonCompetition

    w arm epu c sex reme ywea , asno stoppedthestateandfederalgovernmentsfromimposingmanyrestrictiveregulations

    Inthepast,bankswerenotallowedtoopenupbranchesinotherstates,andinsomestatesbankswererestrictedfromopeningadditionallocations

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    35

    Competition has also been inhibited by regulations thatimpose restrictions on interest rates that can be paid ondeposits

    Regulation:RestrictionsonInterestRates

    widespread belief that unrestricted interestrate

    competition helped encourage bank failures during theGreat Depression

    Later evidence does not seem to support this view, andrestrictions on interest rates have been abolished

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    36

  • 8/14/2019 FA 2013 AFIM Lec 01 Hondouts.pdf

    13/13

    AdvanceFinancialInstrumentsandMarketsLec#01

    13:49

    HammadHassanMirza(Asst.ProfFinance)Dept.BusAdmn.UOS 13

    Because banks play a very important role in determining thesupply of money (which in turn affects many aspects of theeconomy), much regulation of these financial intermediariesis intended to improve control over the money supply

    RegulationReason:ImproveMonetaryControl

    One such regulation isreserve requirements,which make itobligatory for all depository institutions to keep a certainfraction of their deposits in accounts with the FederalReserve System (the Fed), the central bank in the UnitedStates

    Reserve requirements help the Fed exercise more precisecontrol over the money supply

    PropertyofDepartmentofBusinessAdministration,UniversityofSargodha

    37

    ThankYou!

    38PropertyofDepartmentofBusinessAdministration,UniversityofSargodha