Finance 319 Lecture 1

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Finance 319 Lecture 1

• Galina A Schwartz
• Department of Finance
• University of Michigan
• Business School

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Practical Matters I

• Prerequisites Fin 300, CSIB 310 (could be taken
  concurrently)
• Attendance -- desirable, but not mandatory
• Three Home Assignments 20 Case Study
  (LTCM)20
• Class Participation -- up to 40
• (substitutes for written work)

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Practical Matters II

• Midterm take-home 30
• Final Exam 30
• Midterm Score could be dropped then Final is
  60
• Additional time could be purchased on the Final
  Exam

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Practical Matters III

• Readings on the Web, or /and distributed in
  Class
• Textbook NEW EDITION
• Levich, (2001), International Financial Markets
  (expected early February)
• See Syllabus for all practical matters

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Practical Matters IV

• How to find me (or see Syllabus)
• My office D3270A (Davidson Hall)
• My e-mail galka_at_umich.edu
• My office hours
• Mon., 10am -12pm Th., 3pm-5pm,
• or by appointment

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Subject Structure

• International Financial Markets
• I. Foundations of IF
• International Financial System
• (Levich, Part I)
• Foreign Exchange Markets
• (Levich, Part II)
• Regulatory Issues
• (Levich, Part VII)

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Subject Structure (cont.)

• International Financial Markets
• II. Current Institutions
• Offshore and Onshore Markets
• (Levich, Part III)
• Financial Instruments Derivative Securities
• Futures, Options, Swaps
• (Levich, Part IV)
• International Asset Portfolios
• Bond and Equity Portfolios
• (Levich, Parts V VI)

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Why IF?

• Why to study International Financial Markets
  (increased importance)
• How do we study them (dynamic analysis of player
  incentives)
• What issues are important (technology, legal and
  regulatory framework, market micro structure,
  macroeconomic parameters)

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Our Approach to IF

• Less case oriented, more analytical
• Why? Enables us to analyze a wider class of
  problems
• Less computational, more conceptual Less
  quantitative, more qualitative
• Why? Think of your competitive advantage in
  todays world of high specialization.

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Theory and Reality

• Theory is a caricature on reality
• Theory approximates reality
• Theory axioms (assumptions)
• Reality axioms do not hold
• Our task to determine which axioms are violated
  (and how badly)
• Our task how this violation alters the results
  of theoretical model

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Examples

• Axiom PCM (Perfect Capital Markets)
• Its Violations (due to non-zero transaction
  costs, uncertainty, taxes and other regulations)
• Perfect competition?

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Game Theoretic Analysis

• Players (Governments, Regulators, Central Banks,
  Financial Institutions, Corporations,
  Individuals)
• Their objectives (for example, profit
  maximization) possible actions
• Are these games repeated?
• Dynamic world gt Dynamic games

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Skill to Master

• Financial information analysis
• It is a difficult, challenging and slow to learn
  skill
• It is a rigorous approach
• It is frustrating at first
• Then, it is rewarding

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Next Lecture

• Functions of Money
• Governments Banks their roles
• Balance of Payments
• To read Levich, Chapters 1 2
• Summers, L., 2000, AER, Vol. 90, No. 2, pp. 1-27.
• London Stock Exchange The Economist, 2000, Sept.
  2.

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Summary of Today

• Focus of Finance 319
• Financial institutions instruments ( their
  history)
• Why do they exist what role do they play
• The impact of Hi-Tech on Financial System (past,
  present, future)
• International Financial Law its future