Lecture_1_-_An_Introduction_to_Financial_Markets

Lecture_1_-_An_Introduction_to_Financial_Markets - 1....

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Money Markets and Finance Lecture 1 Course Overview and An Introduction to Financial Markets 1. Course Overview During this course, we will consider the answers to the following questions: • What are financial markets and what assets are traded within these markets?; • What are the characteristics of assets traded in financial markets?; and, • What is value and how do we measure the value of assets? 1. Course Overview (Continued) Financial Markets and Instruments In studying financial markets and instruments, we will seek to answer the following questions: • What are financial markets and what role do they serve?; • What type of financial markets are there?; • What types of instruments are traded in each of these markets?; • What are the characteristics of each instrument?; and, • How do these instruments differ from one another? 1. Course Overview (Continued) Valuing Financial Assets We can use the three key ideas in finance to consider the value of financial instruments and how it is measured, namely: • The Time Value of Money; • Diversification; and, • Arbitrage. 1. Course Overview (Continued) The Time Value of Money In studying the time value of money, we will see it forms the basis for all asset valuations. In this course, we will study the following aspects of the time value of money: Time Value of Money Financial Mathematics Valuing Stocks Valuing Bonds Making Investment Decisions 1. Course Overview (Continued) Diversification Financial market participants want to make as much money as possible with the least risk. To reduce risk, market participants can diversify. If everyone diversifies, this tells us something about how assets are priced: It tells us the return required for a given level of risk. Diversification Defining Risk and Understanding its Relationship With Return Portfolio Theory The Capital Asset Pricing Model (CAPM) and the Required Rate of Return for Risk
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1. Course Overview (Continued) Arbitrage If two assets provide identical payoffs, they must also have the same price. This is an idea we can use in the valuation of derivatives such as forwards, futures and options contracts. Arbitrage Forwards and Futures Contracts Options Contracts Options, Forwards and Futures Contracts as Tools for Risk Management 2. What are Financial Markets? A financial market is a mechanism that facilitates the purchase and sale (“trading”) of financial instruments including equity, debt instruments, derivatives and foreign currencies. The main roles of financial markets include: • The bringing together of lenders and borrowers , aiding in the transfer of funds from people who wish to lend them to people who wish to borrow them ( capital raising ); • The transference of risk between parties; and, • International trade. The financial markets, the institutions participating in these markets and
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