Finance (Basics)
Petr Malek
Department of Finance
Office 533
malek.petr@seznam.cz
99563@mail.muni.cz

Structure of lectures
n1.Introduction to finance - ok
n2.Financial markets - ok
n3.Banks and bank systems - ok
n4.Other financial institutions - ok
n5.Present value of money - ok
n6.Private finance;
n7.Investments;
n8.Corporate finance;
n9.International finance - now;
n10.International financial system - now;
n11.Macroekonomic and financial indicators and information;
n12.History of financial science;
n13.Latest trends on financial markets.
n
n

The International Financial system
nGlobal financial system – The International financial system,
n
nThe global financial system (GFS) is the financial system consisting of institutions and
regulators that act on the international level, as opposed to those that act on a national or
regional level.
n
nThe main „players“ are the global institutions, such as International Monetary Fund and Bank for
International Settlements, national agencies and government departments, e.g., central banks and
finance ministries, private institutions acting on the global scale, e.g., banks and hedge funds,
and regional institutions, e.g., the Eurozone.
n
nDeficiencies and reform of the GFS have been hotly discussed in recent years.

The International Financial System - History
nThe history of financial institutions must be differentiated from economic history and history of
money. In Europe, it may have started with the first commodity exchange, the Bruges Bourse in 1309
and the first financiers and banks in the 15th–17th centuries in central and western Europe.
nThe first global financiers the Fuggers (1487) in Germany; the first stock company in England
(Russia Company 1553); the first foreign exchange market (The Royal Exchange 1566, England); the
first stock exchange (the Amsterdam Stock Exchange 1602).
nMilestones in the history of financial institutions are the Gold Standard (1871–1932), the
founding of International Monetary Fund (IMF), World Bank at Bretton Woods, and the abolishment of
fixed exchange rates in 1973.

International Institutions
nThe most prominent international institutions are the IMF, the World Bank and the WTO
nThe International Monetary Fund keeps account of international balance of payments accounts of
member states.
qThe IMF acts as a lender of last resort for members in financial distress, e.g., currency crisis,
problems meeting balance of payment when in deficit and debt default. Membership is based on
quotas, or the amount of money a country provides to the fund relative to the size of its role in
the international trading system.
nThe World Bank aims to provide funding, take up credit risk or offer favorable terms to
development projects mostly in developing countries that couldn't be obtained by the private
sector. The other multilateral development banks and other international financial institutions
also play specific regional or functional roles.

International Institutions
nThe World Trade Organization settles trade disputes and negotiates international trade agreements
in its rounds of talks (currently the Doha Round).
n
nAlso important is the Bank for International Settlements, the intergovernmental organization for
central banks worldwide. It has two subsidiary bodies that are important actors in the global
financial system in their own right - the Basel Committee on Banking Supervision, and the Financial
Stability Board.
n
nIn the private sector, an important organisation is the Institute of International Finance, which
includes most of the world's largest commercial banks and investment banks.

International Monetary Fund
nThe International Monetary Fund (IMF) is the intergovernmental organization that oversees the
global financial system by following the macroeconomic policies of its member countries, in
particular those with an impact on exchange rate and the balance of payments.
nIt is an organization formed with a stated objective of stabilizing international exchange rates
and facilitating development through the enforcement of liberalising economic policies on other
countries as a condition for loans, restructuring or aid.
nIt also offers highly leveraged loans, mainly to poorer countries.
nIts headquarters are in Washington, D.C., United States.
nThe IMF's relatively high influence in world affairs and development has drawn heavy criticism
from some sources.

International Monetary Fund II.
nThe International Monetary Fund was conceived in July 1944 originally with 45 members and came
into existence in December 1945 when 29 countries signed the agreement, with a goal to stabilize
exchange rates and assist the reconstruction of the world's international payment system.
nCountries contributed to a pool which could be borrowed from, on a temporary basis, by countries
with payment imbalances (Condon, 2007).
nThe IMF was important when it was first created because it helped the world stabilize the economic
system. The IMF works to improve the economies of its member countries.
nThe IMF describes itself as "an organization of 187 countries (as of July 2010), working to foster
global monetary cooperation, secure financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and reduce poverty".
nMembers of the IMF are 186 of the UN members and Kosovo.
nFormer members are: Cuba (left in 1964), and Taiwan (expelled in 1980 due to political reasons).
nThe other non-members are: North Korea, Andorra, Monaco, Liechtenstein, Nauru, Vatican City and
the rest of the states with limited recognition.
nAll member states participate directly in the IMF. Member states are represented on a 24-member
Executive Board (five Executive Directors are appointed by the five members with the largest
quotas, nineteen Executive Directors are elected by the remaining members), and all members appoint
a Governor to the IMF's Board of Governors.
nAll members of the IMF are also IBRD members, and vice versa.

International Monetary Fund III.
nThe International Monetary Fund was conceived in July 1944 during the United Nations Monetary and
Financial Conference. The representatives of 45 governments met in the Mount Washington Hotel in
the area of Bretton Woods, New Hampshire, United States, with the delegates to the conference
agreeing on a framework for international economic cooperation.
nThe IMF was formally organized on December 27, 1945, when the first 29 countries signed its
Articles of Agreement. The statutory purposes of the IMF today are the same as when they were
formulated in 1943.
nThe IMF's influence in the global economy steadily increased as it accumulated more members. The
number of IMF member countries has more than quadrupled from the 44 states involved in its
establishment, reflecting in particular the attainment of political independence by many developing
countries and more recently the collapse of the Soviet bloc.
nIn 2008, faced with a shortfall in revenue, the International Monetary Fund's executive board
agreed to sell part of the IMF's gold reserves.
nAt the 2009 G-20 London summit, it was decided that the IMF would require additional financial
resources to meet prospective needs of its member countries during the ongoing global financial
crisis.

IMF - Members' quotas and voting power, and board of governors
nMajor decisions require an 85% supermajority. The United States has always been the only country
able to block a supermajority on its own.
nThe voting power (2,220,817 votes in total). The 27 member states of the European Union have a
combined vote of 710,786 (32.07%).
nOn October 23, 2010, the Ministers of Finance of G-20, governing most of the IMF member quotas,
agreed to reform IMF and shift about 6% of the voting shares to major developing nations and
countries with emerging markets.

World bank
nThe World Bank is an international financial institution that provides leveraged loans to
developing countries for capital programs.
nThe World Bank has a stated goal of reducing poverty. By law, all of its decisions must be guided
by a commitment to promote foreign investment, international trade and facilitate capital
investment.
nThe World Bank differs from the World Bank Group, in that the World Bank comprises only two
institutions: the International Bank for Reconstruction and Development (IBRD) and the
International Development Association (IDA), whereas the latter incorporates these two in addition
to three more: International Finance Corporation (IFC), Multilateral Investment Guarantee Agency
(MIGA), and International Centre for Settlement of Investment Disputes (ICSID)

World Bank - History
nJohn Maynard Keynes represented the United Kingdom at the conference, and Harry Dexter White
represented the United States.
nThe World Bank is one of five institutions created at the Bretton Woods Conference in 1944. The
International Monetary Fund, a related institution, is the second. Delegates from many countries
attended the Bretton Woods Conference. The most powerful countries in attendance were the United
States and United Kingdom, which dominated negotiations.
nAlthough both are based in Washington, D.C., the World Bank is, by custom, headed by an American,
while the IMF is led by a European.
n
n 1945–1968
nFrom its conception until 1967 the bank undertook a relatively low level of lending. Fiscal
conservatism and careful screening of loan applications was common. Bank staff attempted to balance
the priorities of providing loans for reconstruction and development with the need to instill
confidence in the bank.
n
nThe Marshall Plan of 1947 caused lending by the bank to change as many European countries received
aid that competed with World Bank loans. Emphasis was shifted to non-European countries and until
1968, loans were earmarked for projects that would enable a borrower country to repay loans (such
projects as ports, highway systems, and power plants).

World Bank - History
n 1968–1980
nFrom 1968 to 1980, the bank concentrated on meeting the basic needs of people in the developing
world. The size and number of loans to borrowers was greatly increased as loan targets expanded
from infrastructure into social services and other sectors.
nThese changes can be attributed to Robert McNamara who was appointed to the presidency in 1968 by
Lyndon B. Johnson. McNamara imported a technocratic managerial style to the Bank that he had used
as United States Secretary of Defense and President of the Ford Motor Company.
nMcNamara shifted bank policy toward measures such as building schools and hospitals, improving
literacy and agricultural reform.
nMcNamara created a new system of gathering information from potential borrower nations that
enabled the bank to process loan applications much faster. To finance more loans, McNamara told
bank treasurer Eugene Rotberg to seek out new sources of capital outside of the northern banks that
had been the primary sources of bank funding. Rotberg used the global bond market to increase the
capital available to the bank. One consequence of the period of poverty alleviation lending was the
rapid rise of third world debt. From 1976 to 1980 developing world debt rose at an average annual
rate of 20%.

World Bank - History
n 1980–1989
nIn 1980, A.W. Clausen replaced McNamara after being nominated by US President Jimmy Carter.
Clausen replaced a large number of bank staffers from the McNamara era and instituted a new
ideological focus in the bank.
nLending to service third world debt marked the period of 1980–1989. Structural adjustment policies
aimed at streamlining the economies of developing nations (at the expense of health and social
services) were also a large part of World Bank policy during this period. UNICEF reported in the
late 1980s that the structural adjustment programs of the World Bank were responsible for the
"reduced health, nutritional and educational levels for tens of millions of children in Asia, Latin
America, and Africa".
n 1989–present
nFrom 1989, World Bank policy changed in response to criticism from many groups. Environmental
groups and NGOs were incorporated in the lending of the bank in order to mitigate the effects of
the past that prompted such harsh criticism. Bank projects "include" green concerns.

World Bank - Members
nThe International Bank for Reconstruction and Development (IBRD) has 187 member countries, while
the International Development Association (IDA) has 168 members. Each member state of IBRD should
be also a member of the International Monetary Fund (IMF) and only members of IBRD are allowed to
join other institutions within the Bank (such as IDA).

World Bank - Voting Power
nIn 2010, voting powers at the World Bank were revised to increase the voice of developing
countries, notably China.
nThe countries with most voting power are now:
qthe United States (15.85%),
qJapan (6.84%),
qChina (4.42%),
qGermany (4.00%),
qthe United Kingdom (3.75%),
qand France (3.75%)
nUnder the changes, known as 'Voice Reform - Phase 2', other countries that saw significant gains
included Brazil, India, South Korea and Mexico.
nMost developed countries' voting power was reduced.
nUnited States', Russia's and Saudi Arabia's voting power was unchanged

World Bank - Poverty Reduction Strategies
nFor the poorest developing countries in the world, the bank's assistance plans are based on
poverty reduction strategies; by combining a cross-section of local groups with an extensive
analysis of the country's financial and economic situation the World Bank develops a strategy
pertaining uniquely to the country in question.
nThe government then identifies the country's priorities and targets for the reduction of poverty,
and the World Bank aligns its aid efforts correspondingly.
nForty-five countries pledged US$25.1 billion in "aid for the world's poorest countries", aid that
goes to the World Bank International Development Association (IDA) which distributes the gifts to
eighty poorer countries. While wealthier nations sometimes fund their own aid projects, including
those for diseases, and although IDA is the recipient of criticism

World trade Organization
nThe World Trade Organization (WTO) is an organization that intends to supervise and liberalize
international trade.
nThe organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing
the General Agreement on Tariffs and Trade (GATT), which commenced in 1948.
nThe organization deals with regulation of trade between participating countries;
qit provides a framework for negotiating and formalizing trade agreements, and a dispute resolution
process aimed at enforcing participants' adherence to WTO agreements which are signed by
representatives of member governments and ratified by their parliaments.
nMost of the issues that the WTO focuses on derive from previous trade negotiations, especially
from the Uruguay Round (1986-1994).

World Trade Organization
nThe organization is currently endeavoring to persist with a trade negotiation called the Doha
Development Agenda (or Doha Round), which was launched in 2001 to enhance equitable participation
of poorer countries which represent a majority of the world's population.
nHowever, the negotiation has been dogged by "disagreement between exporters of agricultural bulk
commodities and countries with large numbers of subsistence farmers on the precise terms of a
'special safeguard measure' to protect farmers from surges in imports.
qAt this time, the future of the Doha Round is uncertain.
n

ITO and GATT
nThe WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), was established after
World War II in the wake of other new multilateral institutions dedicated to international economic
cooperation — notably the Bretton Woods institutions known as the World Bank and the International
Monetary Fund.
nA comparable international institution for trade, named the International Trade Organization was
successfully negotiated.
nThe ITO used to be a United Nations specialized agency and would address not only trade barriers
but other issues indirectly related to trade, including employment, investment, restrictive
business practices, and commodity agreements.
nBut the ITO treaty was not approved by the U.S. and a few other signatories and never went into
effect
nIn the absence of an international organization for trade, the GATT would over the years
"transform itself" into a de facto international organization

Trading System Principles
nThe WTO establishes a framework for trade policies.
nIt does not define or specify outcomes. That is, it is concerned with setting the rules of the
trade policy games. Five principles are of particular importance in understanding both the pre-1994
GATT and the WTO:
1.Non-Discrimination. It has two major components: the most favoured nation (MFN) rule, and the
national treatment policy. Both are embedded in the main WTO rules on goods, services, and
intellectual property, but their precise scope and nature differ across these areas.
nThe MFN rule requires that a WTO member must apply the same conditions on all trade with other WTO
members, i.e. a WTO member has to grant the most favorable conditions under which it allows trade
in a certain product type to all other WTO members.
2.Reciprocity. It reflects both a desire to limit the scope of free-riding that may arise because
of the MFN rule, and a desire to obtain better access to foreign markets.
nA related point is that for a nation to negotiate, it is necessary that the gain from doing so be
greater than the gain available from unilateral liberalization.
n

Trading System Principles II.
3.Binding and enforceable commitments. The tariff commitments made by WTO members in a multilateral
trade negotiation and on accession are enumerated in a schedule (list) of concessions. These
schedules establish "ceiling bindings": a country can change its bindings, but only after
negotiating with its trading partners, which could mean compensating them for loss of trade. If
satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement
procedures.
4.Transparency. The WTO members are required to publish their trade regulations, to maintain
institutions allowing for the review of administrative decisions affecting trade, to respond to
requests for information by other members, and to notify changes in trade policies to the WTO.
5.Safety valves. In specific circumstances, governments are able to restrict trade. There are three
types of provisions in this direction: articles allowing for the use of trade measures to attain
noneconomic objectives; articles aimed at ensuring "fair competition"; and provisions permitting
intervention in trade for economic reasons.

Bank for International Settlements
nThe Bank for International Settlements (BIS) is an intergovernmental organization of central banks
which "fosters international monetary and financial cooperation and serves as a bank for central
banks."
nIt is not accountable to any national government. The BIS carries out its work through
subcommittees, the secretariats it hosts, and through its annual General Meeting of all members.
nIt also provides banking services, but only to central banks, or to international organizations
like itself.
nBased in Basel, Switzerland, the BIS was established by the Hague agreements of 1930.
nIt has representative offices in Hong Kong and Mexico City

BIS - Organization of Central Banks
nAs an organization of central banks, the BIS seeks to make monetary policy more predictable and
transparent among its 57 member central banks.
nWhile monetary policy is determined by each sovereign nation, it is subject to central and private
banking scrutiny and potentially to speculation that affects foreign exchange rates and especially
the fate of export economies.
nFailures to keep monetary policy in line with reality and make monetary reforms in time,
preferably as a simultaneous policy among all 57 member banks and also involving the International
Monetary Fund, have historically led to losses in the billions as banks try to maintain a policy
using open market methods that have proven to be unrealistic.

BIS – Role in Banking Supervision
nCentral banks do not unilaterally "set" rates, rather they set goals and intervene using their
massive financial resources and regulatory powers to achieve monetary targets they set.
qOne reason to coordinate policy closely is to ensure that this does not become too expensive and
that opportunities for private arbitrage exploiting shifts in policy or difference in policy, are
rare and quickly removed.
nTwo aspects of monetary policy have proven to be particularly sensitive, and the BIS therefore has
two specific goals:
qto regulate capital adequacy and make reserve requirements transparent.
n

BIS – Role in Banking Supervision
nThe BIS provides the Basel Committee on Banking Supervision with its twelve-member secretariat,
and with it has played a central role in establishing the Basel Capital Accords of 1988 and 2004.
nThere remain significant differences between US, EU and UN officials regarding the degree of
capital adequacy and reserve controls that global banking now requires.
nPut extremely simply, the US as of 2006 favoured strong strict central controls in the spirit of
the original 1988 accords, the EU was more inclined to a distributed system managed collectively
with a committee able to approve some exceptions.
nThe UN agencies especially ICLEI are firmly committed to fundamental risk measures: the so-called
triple bottom line and were becoming critical of central banking as an institutional structure for
ignoring fundamental risks in favour of technical risk management.
n

System of Exchange Rates
nRate of exchange: the charge for exchanging currency of one country for currency of another
nThe amount of one currency that a person or institution defines as equivalent to another when
either buying or selling it at any particular moment; The rate at which one currency can be
exchanged for another, usually expressed as the value of the one in terms of the other
nIn finance, the exchange rates (also known as the foreign-exchange rate, forex rate or FX rate)
between two currencies specify how much one currency is worth in terms of the other. It is the
value of a foreign nation’s currency in terms of the home nation’s currency.
nFor example an exchange rate of 91 Japanese yen (JPY, ¥) to the United States dollar (USD, $)
means that JPY 91 is worth the same as USD 1.
nThe foreign exchange market is one of the largest markets in the world. By some estimates, about
3.2 trillion USD worth of currency changes hands every day.

Exchange Rates
nAn exchange system quotation is given by stating the number of units of "quote currency" (price
currency, payment currency) that can be exchanged for one unit of "base currency" (unit currency,
transaction currency).
nFor example, in a quotation that says the EUR/USD exchange rate is 1.2290 (1.2290 USD per EUR,
also known as EUR/USD), the quote currency is USD and the base currency is EUR.
nQuotes using a country's home currency as the price currency (e.g., 25.45 CZK =EUR  1.00) are
known as direct quotation or price quotation (from that country's perspective) and are used by most
countries.
nIndirect quotation

Currency
nCurrency depreciation is the loss of value of a country's currency with respect to one or more
foreign reference currencies, typically in a floating exchange rate system.
nIt is most often used for the unofficial increase of the exchange rate due to market forces,
though sometimes it appears interchangeably with devaluation. Its opposite is called appreciation.
n
nRevaluation means a rise of a price of goods or products. This term is specially used as
revaluation of a currency, where it means a rise of currency to the relation with a foreign
currency in a fixed exchange rate. In floating exchange rate correct term would be appreciation.
nThe antonym of revaluation is devaluation. Altering the face value of a currency without changing
its foreign exchange rate is a redenomination, not a revaluation.

Cross Rate
nThe currency exchange rate between two currencies, both of which are not the official currencies
of the country in which the exchange rate quote is given in.
nThis phrase is also sometimes used to refer to currency quotes which do not involve the U.S.
dollar, regardless of which country the quote is provided in.
nFor example, if an exchange rate between the Euro and the Japanese Yen was quoted in an American
newspaper, this would be considered a cross rate in this context, because neither the euro or the
yen is the standard currency of the U.S.
nHowever, if the exchange rate between the euro and the U.S. dollar were quoted in that same
newspaper, it would not be considered a cross rate because the quote involves the U.S. official
currency.

Cross Rate
nYou have two rates (exchange rates):
qFor example direct quotation in CZK:
nCZK/EUR = 25,058
nCZK/USD = 17,023
ncross rate must be USD/EUR
so USD/EUR = 1,472
n
nIndirect quotation:
n so EUR/USD = 0,6793

Example - Cross Rate
CZK/EUR
24,650
CZK/USD
18,063
CZK/JPY
0,2107
CZK/CAD
17,739
CZK/HKD
2,330
CZK/CHF
18,293
CZK/GBP
28,917

Example – Cross Rate
EUR
USD
JPY
CAD
HKD
CHF
GBP
EUR
-
1,3647
USD
0,7328
-
JPY
-
CAD
-
HKD
-
CHF
-
GBP
-

SDR
nSpecial Drawing Right.
nAn artificial currency unit based upon several national currencies.
nThe Special Drawing Right serves as the official monetary unit of several international
organizations including the International Monetary Fund, and acts as a supplemental reserve for
national banking systems.
nFor members of the IMF, the Special Drawing Rights can be used to settle trade balances between
countries and to repay the IMF. An IMF member country has to supply its own currency to another
member country in exchange for SDRs, unless that country already holds a certain specified amount
of SDRs.

nThank you for your attention