FINANCE.pdf - Finance Contents 1 2 3 Main article 1 1.1...

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Unformatted text preview: Finance Contents 1 2 3 Main article 1 1.1 Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.1 Areas of finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1.2 Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.1.3 Financial theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.1.4 Professional qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.1.5 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.1.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.1.7 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 The main techniques and sectors of the financial industry 7 2.1 Financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1.1 The history of financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1.2 Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.1.3 Foreign exchange services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1.4 Investment services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1.5 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1.6 Other financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.1.7 Financial crime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.1.8 Market share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.1.9 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 2.1.10 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.1.11 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.1.12 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Personal finance 11 3.1 Personal finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.1.1 Personal financial planning process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.1.2 Areas of focus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.1.3 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.1.4 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.1.5 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.1.6 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 i ii 4 CONTENTS Corporate finance 13 4.1 Corporate finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.1.1 Outline of corporate finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.1.2 Capital structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.1.3 Investment and project valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.1.4 Dividend policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.1.5 Working capital management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 4.1.6 Relationship with other areas in finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 4.1.7 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1.8 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1.9 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.1.10 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Financial capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.2.1 Three concepts of capital maintenance authorized in IFRS . . . . . . . . . . . . . . . . . . 21 4.2.2 Sources of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.2.3 Differences between shares and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.2.4 Fixed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.2.5 Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.2.6 Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.2.7 Own and borrowed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.2.8 Issuing and trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.2.9 Broadening the notion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.2.10 Marxian perspectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.2.11 Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.2.12 Economic role . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.2.13 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.2.14 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 4.2.15 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Cornering the market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.3.1 Historical examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.3.2 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.4.1 History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 4.4.2 Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 4.4.3 Societal effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 4.4.4 Insurers’ business model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 4.4.5 Types of insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 4.4.6 Insurance companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 4.4.7 Across the world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 4.4.8 Controversies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 4.4.9 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 4.2 4.3 4.4 CONTENTS 5 6 7 iii 4.4.10 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 4.4.11 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 4.4.12 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Risk Management 48 5.1 Derivative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.1.1 Collateralised debt obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.1.2 Credit default swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 5.1.3 Forwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.1.4 Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 5.1.5 Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 5.1.6 Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 5.1.7 Swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 5.1.8 Financial derivative trading companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 5.1.9 Basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.1.10 Size of market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 5.1.11 Usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 5.1.12 Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 5.1.13 Economic function of the derivative market . . . . . . . . . . . . . . . . . . . . . . . . . 55 5.1.14 Valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 5.1.15 Criticisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 5.1.16 Financial Reform and Government Regulation . . . . . . . . . . . . . . . . . . . . . . . . 57 5.1.17 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 5.1.18 Financial derivative trading companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.1.19 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.1.20 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.1.21 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 5.1.22 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Finance of states 64 6.1 Public finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 6.1.1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 6.1.2 Public finance management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 6.1.3 Government expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 6.1.4 Financing of government expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 6.1.5 Government Finance Statistics and Methodology . . . . . . . . . . . . . . . . . . . . . . . 67 6.1.6 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 6.1.7 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 6.1.8 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 6.1.9 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Financial economics 71 iv CONTENTS 7.1 8 9 Financial economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 7.1.1 Underlying economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 7.1.2 Resultant models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 7.1.3 Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 7.1.4 Challenges and criticism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 7.1.5 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 7.1.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 7.1.7 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 7.1.8 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Financial mathematics 80 8.1 Financial mathematics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 8.1.1 History: Q versus P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 8.1.2 Criticism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 8.1.3 Mathematical finance articles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 8.1.4 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 8.1.5 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 8.1.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Experimental finance 83 9.1 Experimental finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 9.1.1 History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 9.1.2 Scientific value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 9.1.3 Advantages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 9.1.4 Types of experiments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 9.1.5 Main findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 9.1.6 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 9.1.7 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 9.1.8 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 10 Behavioral finance 86 10.1 Behavioral finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 10.1.1 Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 10.1.2 History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 10.1.3 Criticisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 10.1.4 Notable theorists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 10.1.5 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 10.1.6 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 10.1.7 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 10.1.8 External links . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 11 Intangible asset finance 11.1 Intangible asset finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 96 CONTENTS v 11.1.1 Basic principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 11.1.2 Business models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 11.1.3 Significant transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 11.1.4 Government, societies, think tanks, and other non-profits . . . . . . . . . . . . . . . . . . 97 11.1.5 See also . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 11.1.6 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 11.1.7 Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 12 Text and image sources, contributors, and licenses 12.1 Text . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 98 12.2 Images . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 12.3 Content license . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 Chapter 1 Main article 1.1 Finance • Protection against unforeseen personal events, as well as events in the wider economy For the board game, see Finance (game). “Financial” redirects here. For the Caucasian newspaper, see FINANCIAL. • Transference of family across generations (bequests and inheritance) • Effects of tax policies (tax subsidies and/or penalties) on management of personal finances Finance is a field that deals with the allocation of assets and liabilities over time under conditions of certainty and • Effects of credit on individual financial standing uncertainty. Finance can also be defined as the science of • Development of a savings plan or financing for large money management. A key point in finance is the time purchases (auto, education, home) value of money, which states that purchasing power of one unit of currency can vary over time. Finance aims to • Planning a secure financial future in an environment price assets based on their risk level and their expected of economic instability rate of return. Finance can be broken into three different sub-categories: public finance, corporate finance and Personal finance may involve paying for education, fipersonal finance. nancing durable goods such as real estate and cars, buying insurance, e.g. health and property insurance, investing and saving for retirement. 1.1.1 Areas of finance Personal finance may also involve paying for a loan, or debt obligations. The six key areas of personal financial planning, as suggested by the Financial Planning Standards Board, are:[1] 1. Financial position: is concerned with understanding the personal resources available by examining net worth and household cash flow. Net worth is a person’s balance sheet, calculated by adding up all assets under that person’s control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the expected sources of income within a year, minus all expected expenses within the same year. From this analysis, the financial planner can determine to what degree and in what time the personal goals can be accomplished. Wall Street, the center of American finance. 2. Adequate protection: the analysis of how to protect a household from unforeseen risks. These risks can be divided into liability, property, death, disability, health and long term care. Some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance. Business owners, professionals, athletes Personal finance Main article: Personal finance Questions in personal finance revolve around: 1 2 CHAPTER 1. MAIN ARTICLE and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a critical piece of the overall investment planning. 3. Tax planning: typically the income tax is the single largest expense in a household. Managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, which can be used to reduce the lifetime tax burden. Most modern governments use a progressive tax. Typically, as one’s income grows, a higher marginal rate of tax must be paid. Understanding how to take advantage of the myriad tax breaks when planning one’s personal finances can make a significant impact in which it can later save you money in the long term. 4. Investment and accumulation goals: planning how to accumulate enough money - for large purchases and life events - is what most people consider to be financial planning. Major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for e...
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    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

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    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

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    Dana University of Pennsylvania ‘17, Course Hero Intern

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    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

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    Jill Tulane University ‘16, Course Hero Intern