Finance 319 Lecture 2 Basic Concepts

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Finance 319 Lecture 2 Basic Concepts

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

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Practical Matters Office Hours Change

• My office D3270A (Davidson Hall)
• My e-mail galka_at_umich.edu
• My office hours
• Mon., 10am -12pm , Th., 1 pm -3 pm
• or by appointment
• Notice a change was Th., 3 pm - 5 pm

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Basic Concepts I

• Money and Money Functions
• Balance of Payments
• Perfectly Competitive Market
• Imperfect Competition
• Monopoly
• Market Power
• Prisoners Dilemma

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Money and Money Functions

• Types of Money
• Commodity Money
• Fiat Money
• Functions of Money, Levich, p.32
• 1. Medium of Exchange goods, services, debt
• 2. Store of Value
• 3. Unit of Account
• Sterilization Sterilized Intervention

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Current Capital Account and Balance of Payments

• Current Account Exports - Imports
• Capital Account Investment - Savings
• Current Account Capital Account Official
  Balance of Payments
• Current Account Capital Account Changes in
  Reserves

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Basic Concepts II

• Regulation
• Gains from Trade
• Competitive Advantage
• International division of labor
• Specialization
• Taxes
• Rate of return on capital
• Required return

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Basic Concepts III

• Government credibility
• Commitment
• Commitment constraint
• Optimal policies
• Objective Function (or just objective)
• Time inconsistent optimal policies

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Basic Concepts IV

• Exchange rate
• fixed
• floating
• pegged
• currency board
• Exchange rates
• nominal versus real
• Interest rates
• nominal versus real

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Basic Concepts V

• Capital controls
• Transaction costs
• Perfect Capital Market
• zero transaction costs
• no capital controls
• zero taxes
• no regulations
• no uncertainty

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Basic Concepts VI

• Objective Function (or just objective)
• Time inconsistent optimal policies
• Regulation
• loss costs of regulation
• gain benefits from regulation
• net regulatory burden gain -loss

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Basic Concepts VII

• Expected value
• Inflation rate
• FED objective function is to keep
• 1. unemployment ?
• 2. inflation ?
• controversy between 1 2
• Hedging

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Basic Concepts VIII

• Types of Risk (Levich, page 5)
• counterparty
• liquidity
• delivery
• rollover
• Risk neutral risk-averse
• Costs and benefits analysis