Finance lecture 1 - ECON 3050A Introduction To Financial...

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ECON 3050A Introduction To Financial Economics Lecture 1 Asset Markets And Asset Prices • We will consider how asset prices are determine and, consequently their rates of return • Central to asset price determination is the process of arbitrage, a process that exploits price differences among assets • We will also examine the efficiency of capital markets’ performance. Capital Markets They can best be defined in terms of the functions they execute. 1. Clearing and settling Payments - facilitate the exchange of goods, services and assets and the corresponding transfer of ownership and payment. 2. Pooling Resources and subdividing Shares - many investors are able to pool their funds to finance a project bearing only a small portion of the project cost and risk. 3. Resources transferred across Time and Space - allows surplus funds of households and firms to be transferred to those who wish to invest them for future returns. 4. Manages Risk - investors are able to manage risk, for example, insurance companies pool risk, investment diversification exploits the low correlation among risky projects. 5. Price Information - Financial systems provide prices at which an exchange can take place i.e. agreements. Also, expectations of future asset price volatility is derived from existing market prices.
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6. Deals with Incentive Problems - Helps construct the kind of contracts that fulfill investors needs and cope with contingencies that a contract my not explicitly take into account . For example, if a company’s operations are partly financed with debt, the contract may stipulate that the firm’s managers act in the interest of the shareholders. We will focus on the operations of Mature Financial Systems therefore considering the following capital markets; • Stock Markets The main “secondary market” for corporate shares. Trade takes place between investors, corporations are not involved. The primary market is the market into which these shares were originally issued by corporations. The patters of share prices is summarized by stock price indexes such as • Bond Markets These are long term securities – government debt, corporate bonds. Usually, they give a promise to pay (i) a series of coupons (interest) (ii) a lump sum at maturity (face value) at a future date. They are traded like shares. • Money Markets Facilitates the trade of short-term securities – T-bills, other s-t corporate/government loans (3,6,12 months), Certificates of Deposit (CD’s). • Commodity Markets Highly organized markets in; precious metals (gold, silver, platinum), industrial metals (lead, tin, zinc), agricultural commodities (wheat, sugar, coffee), petrochemicals (oil, gasoline) – all traded in contracts for delivery of the commodity at a future date – 30, 60, 90, 120 days, --- 1year out. • Physical Asset Markets
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Finance lecture 1 - ECON 3050A Introduction To Financial...

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