Finance (Basic) Ludek Benada Department of Finance Office 412 benada@mail.muni.cz Structure of lectures qIntroduction to finance qFinancial markets qBanks and bank systems qOther financial institutions qTime value of money qCorporate finance qPersonal finance qInvestments qInternational finance, International financial system Why study finance? qTo manage your personal resources qTo deal with the world of business qTo pursue interesting and rewarding career opportunities qTo make informed public choices as a citizen qTo be able answer different questions… qI want buy a new car. Should I use my cash saving, lease, borrow? qWhat happens if the government changes the tax rate? qWhich is the best way to pay my house? qI am thinking about starting a new business. Will it reward me adequately? qShould I change money for my Christmas holiday now or later? qect. What is finance Definition: Finance is the study of concepts, applications, and systems that affect the value (or wealth) of individuals, companies, and countries over the short and long term. The study of finance is both qualitative and quantitative. Finance ≠ money Cash versus Credit money Functions of money: q Medium of exchange q Unit of account q Store of value Scope of finance q Corporate Finance q International Finance q Private Finance q Public Finance q Derivatives q Risk Management q Portfolio Theory q Asset Pricing q Financial Economics Finance nowadays and before Tough financial dealings have existed for centuries, their presence and importance have become even more apparent in out modern era of technology, information, consumption, and investment. Impact of finance qGDP qCPI qSM qi qOil qect. Financial system Definition: In finance, the FS is the system that allows the transfer of money between savers and borrowers. It comprises a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions. Function of FS qTransferring money qShare risk q to clear and to settle payments; q to aggregate and to disaggregate wealth and flows of funds bringing together large/small-scale investors with savers; q to shift financial resources over time, space and industries; q to accumulate, to process and to disseminate information for decision making purposes; q to provide ways for managing uncertainty and controlling risk. Form of FS Great variety of FS in different countries. e.g. qUSA qGermany Spending sector (Macroeconomic) qHousehold qBusiness Firms qGovernment qForeign Sector Surplus spending units qHas more cash income flow than expenditure qOther terms for SU – saver, lender,… qThe SU may buy financial assets, hold more money, … qUsually Household and foreign sectors Deficit spending units qHas more expenditures on consuption and real goods qMust participate in the financial sector qBorrower, demander of loanable funds, and seller of securities Financial claims qContracts related to the transfer of funds; qFinancial assets and liabilities, securities, loans and financial investment; qEvery FA an offsetting FL. The flow of funds diagram Funds Funds Surplus Spending Unit (SSU) Deficit Spending Unit (DSU) Financial Assets = Financial Claims Financial intermediaries Channeling funds between surplus and deficit agents (Banks, Insurance companies, ….). Major function of intermediaries qMaturity transforming qRisk transforming qConvenience denomination Adventagies of FI qCost advantage: qReconciling conflicting preferences of lenders and borrowers qRisk aversion intermediaries help spread out the risk qEconomies of scale – reducing costs of lending and borrowing qEconomics of scope - intermediaries concentrate on the demands of the lenders and borrowers and are able to enhance their products and services qMarket failure protection DIRECT FINANCING (Markets) Deficit Spending Unit (DSU) Surplus Spending Unit (SSU) INDIRECT FINANCIAL INVESTMENT OR INTERMEDIATION FINANCING Brokers Dealers Intermediaries Funds Funds Funds Funds The flow of funds diagram > Thank you for your attention