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 - ok; n7.Investments - ok; n8.Corporate finance - ok; n9.International finance - ok; n10.International financial system - ok; n11.Macroeconomic and financial indicators and information - now; n12.History of financial science - now; n13.Latest trends on financial markets - now. n n Macroeconomic and financial indicators and information nGDP nInflation nInterest rate n nDebt market nEquity market n Dependance between Economy, Interest Rate and Price of Bonds Economy Interest rate Bonds Bonds Economy Interest rate GDP nGDP (gross domestic product) is the amount of goods and services produced in a year, in a country. nIt is the market value of all final goods and services made within the borders of a country in a year. It is often positively correlated with the standard of living, alternative measures to GDP for that purpose. nThe expenditure method: qGDP = C + I + G + Nx (private consumption + gross investment + government spending + (exports − imports), nEffective scale nEconomic importance GDP nIncome Approach - this method measures GDP by adding incomes that firms pay households for the factors of production they hire- wages for labor, interest for capital, rent for land and profits for entrepreneurship. n n Wages, salaries, and supplementary labour income n Corporate profits n Interest and miscellaneous investment income n Farmers’ income n Income from non-farm unincorporated businesses n These five income components sum to net domestic income at factor cost. n n Two adjustments must be made to get GDP: qIndirect taxes minus subsidies are added to get from factor cost to market prices. qDepreciation (or capital consumption) is added to get from net domestic product to gross domestic product. n n nExpenditure approach GDP Pořadí Country GDP (milions USD) GDP per capita (USD) World 60 917 477 EU 18 387 785 EMU 13 646 370 1. USA 14 441 425 47 439 2. Japan 4 910 692 38 457 3. China 4 327 448 3 259 4. Germany 3 673 105 44 728 5. France 2 866 951 46 037 6. Great Britain 2 680 000 43 733 7. Italy 2 313 893 38 996 8. Russia 1 676 584 11 806 9. Spain 1 601964 35116 10. Brazil 1 572 839 8 295 40. Czech Republic 246 354 20 759 58. Slovak Republic 95 404 17 646 Source : http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/weoselgr.aspx GDP and π nNominal value of GDP (GDP current prices) nReal value of GDP (GDP constant prices) nGDP and financial market Interest rate CZK GDP Equity market Bond Market nInflation is … nInflation measurement nPrice index qConsumer Price Index (CPI), qGDP Deflator, qProducer Price Index (PPI). Inflation Inflation nIn economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time nInflation is usually estimated by calculating the inflation rate of a price index, usually the Consumer Price Index. nThe Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer". nThe inflation rate is the percentage rate of change of a price index over time The Consumer Price Index, PPI, GDP Deflator nhttp://www.czso.cz/eng/redakce.nsf/i/consumer_basket_2010/$File/c_basket2010.pdf nProducer price indices (PPIs) which measures average changes in prices received by domestic producers for their output. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. qThere is also typically a delay between an increase in the PPI and any eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. nGDP deflator is a measure of the price of all the goods and services included in Gross Domestic Product (GDP). It is defined as its nominal GDP measure divided by its real GDP measure. CPI, IPD Producer Price Index nThe price index of agricultural producers is calculated every month from prices collected among approximately 650 selected producers in agriculture (private, cooperative and state-owned companies) and does not include VAT. nCollected are prices (excluding those of output for own consumption) designed for and obtained in internal market. qSince 1 January 2001, prices of agricultural producers are measured on 95 fundamental agricultural products (price representatives): 63 plant products (including fruits and vegetables) and 32 livestock products. nAverage prices of the products are calculated as a simple arithmetic mean of prices of individual producers. Price indices of the individual products (representatives) are obtained through weighing the calculated average prices with particular, individually determined weight proportions of individual products in a given month. qThe weight proportions are determined for both products and their aggregates. n Producer Price Index nThe industrial producer price index are surveyed monthly on the basis of data provided by the selected organizations (about 1200) for the selected representatives (about 4700). qThe reported prices are those agreed upon between the supplier and the customer inland. They exclude VAT, excise tax, costs of transport to the customer and costs incidental to the transport, and are invoiced for the more important trade cases. n nPrice indices of construction work are calculated from prices measured in the specialized quarterly reporting. qTherefore monthly indices are estimated with the help of another monthly statistical survey at CZSO. nThe aggregate price index of market services includes the following price indices in the business sphere (i.e. between businesses): qprice indices of internal goods transport, postal and communications services, financial intermediation, and the other business services and sewerage. Kinds of inflation nHoarding qPeople buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the losses expected from the declining purchasing power of money, creating shortages of the hoarded goods. nHyperinflation qIf inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply goods. Hyperinflation can lead to the abandonment of the use of the country's currency, leading to the inefficiencies of barter. n History of Financial Science nNobel Prize qJ. Tobin (1981) qF. Modigliani (1985) qH. Markowitz, W. Sharpe a M. Miller (1990) qM. Scholes a R. Merton (1997) n J. Tobin nJames Tobin (March 5, 1918 – March 11, 2002) was an American economist who, in his lifetime, served on the Council of Economic Advisors and the Board of Governors of the Federal Reserve System, and taught at Harvard and Yale Universities. qHe developed the ideas of Keynesian economics, and advocated government intervention to stabilize output and avoid recessions. qHis academic work included pioneering contributions to the study of investment, monetary and fiscal policy and financial markets. qHe also proposed an econometric model for censored endogenous variables, the well known "Tobit model". Tobin received the Nobel Memorial Prize in Economic Sciences in 1981. nTobin was widely known for his suggestion of a tax on foreign exchange transactions, now known as the "Tobin tax". qThis was designed to reduce speculation in the international currency markets, which he saw as dangerous and unproductive. He suggested that the proceeds of the tax could be used to fund projects for the benefit of Third World countries, or to support the United Nations. n F. Modigliani nThe Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. nThe basic theorem states that, under a certain market price process (the classical random walk), in the absence of taxes, bankruptcy costs, and asymmetric information, and in an efficient market, the value of a firm is unaffected by how that firm is financed. nIt does not matter if the firm's capital is raised by issuing stock or selling debt. It does not matter what the firm's dividend policy is. nTherefore, the Modigliani-Miller theorem is also often called the capital structure irrelevance principle. qModigliani was awarded the 1985 Nobel Prize in Economics for this and other contributions. H. Markowitz, W. Sharpe a M. Miller nHarry Max Markowitz (born August 24, 1927) is an American economist and a recipient of the John von Neumann Theory Prize and the Nobel Memorial Prize in Economic Sciences. nHe is best known for his pioneering work in Modern Portfolio Theory, studying the effects of asset risk, return, correlation and diversification on probable investment portfolio returns. nA Markowitz Efficient Portfolio is one where no added diversification can lower the portfolio's risk for a given return expectation (alternately, no additional expected return can be gained without increasing the risk of the portfolio). nThe Markowitz Efficient Frontier is the set of all portfolios that will give the highest expected return for each given level of risk. These concepts of efficiency were essential to the development of the Capital Asset Pricing Model. W. Sharpe nCAPM qSystematic risk qNonsystematic risk M. Scholes a R. Merton nThe Black–Scholes model is a mathematical description of financial markets and derivative investment instruments. qThe model develops partial differential equations whose solution, the Black–Scholes formula, is widely used in the pricing of European-style options. nThe model was first articulated by Fischer Black and Myron Scholes in their 1973 paper, "The Pricing of Options and Corporate Liabilities." nThe fundamental insight of Black-Scholes is that the option is implicitly priced if the stock is traded. Robert C. Merton was the first to publish a paper expanding the mathematical understanding of the options pricing model and coined the term Black–Scholes options pricing model. Latest trends on financial markets nGlobal megatrends qGlobalization qEnergy qClimate changes qDemographic development (growth) Globalization nGlobalization describes the process by which regional economies, societies, and cultures have become integrated through a global network of political ideas through communication, transportation, and trade. nThe term is most closely associated with the term economic globalization: the integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, the spread of technology, and military presence. nHowever, globalization is usually recognized as being driven by a combination of economic, technological, sociocultural, political, and biological factors. nThe term can also refer to the transnational circulation of ideas, languages, or popular culture through acculturation. An aspect of the world which has gone through the process can be said to be globalized. Energy nOil qSupply nAlternative sources Climate Changes n1 century = 6 degrees of Celsius nNicholas Stern calculating the cost of climate change (20% GDP) nNatural risk – new financial instruments (flood bonds) Demographic growth nMaltus – qWorld population … 1805 – 2050 nEurope and 2015 nGrowth and structure of population nNatality and mortality nAverage age of population nMigration nRetirement age n Financial Trends nCross selling nLiberalization nSecuritization nE-Banking Financial Crisis nThe financial crisis of 2007 to the present was triggered by a liquidity shortfall in the United States banking system. qIt has resulted in the collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. qIn many areas, the housing market has also suffered, resulting in numerous evictions, foreclosures and prolonged vacancies. nIt is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. Financial Crisis nIt contributed to the failure of key businesses, declines in consumer wealth estimated in the hundreds of billions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity. nThe collapse of the housing bubble, which peaked in the U.S. in 2006, caused the values of securities tied to real estate pricing to plummet thereafter, damaging financial institutions globally. Questions regarding bank solvency, declines in credit availability, and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during late 2008 and early 2009. nEconomies worldwide slowed during this period as credit tightened and international trade declined. nCritics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st century financial markets. nGovernments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion, and institutional bailouts. n Financial Crisis nThe Crisis of Credit Visualized nhttp://www.youtube.com/watch?v=Q0zEXdDO5JU n nThank you for your attention