Check the availability and buy your books from our Bookshop.

Online Business School for the delivery and management of
your own existing or the customised versions of our programmes for in-class or global distance learning.

For further information see also

Curriculum and Learning Contents

Learning Material and Environment

Terms and Conditions

Privacy Policy

Products and Services

The Bookshop

Today's Videos Playlist

Rationale

Teaching and Learning Resources

Financial Markets and Financial Instruments
Valuing Financial Assets
Valuing Real Assets
Capital Financial Structure
Incentives, Information, and Corporate Control
Risk Management

Case Studies

Learner Support

Resources

Assignments, Assessments

Assessment Regulations

Learning Centres

Financial Markets and Corporate Strategy

Rationale

In economics, a financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other fungible items of value at low transaction costs and at prices that reflect the efficient-market hypothesis.

Both general markets (where many commodities are traded) and specialized markets (where only one commodity is traded) exist. Markets work by placing many interested buyers and sellers in one "place", thus making it easier for them to find each other. An economy which relies primarily on interactions between buyers and sellers to allocate resources is known as a market economy in contrast either to a command economy or to a non-market economy such as a gift economy.

In finance, financial markets facilitate:

The raising of capital (in the capital markets)
The transfer of risk (in the derivatives markets)
The transfer of liquidity (in the money markets)
International trade (in the currency markets)

– and are used to match those who want capital to those who have it.

Typically a borrower issues a receipt to the lender promising to pay back the capital. These receipts are securities which may be freely bought or sold. In return for lending money to the borrower, the lender will expect some compensation in the form of interest or dividends.

In mathematical finance, the concept continuous-time Brownian motion stochastic process is sometimes used as a model.

See also

External links

Financial Markets with Yale Professor Robert Shiller

Today's Videos

Connect with us on http://www.youtube.com/finntrack
Google's Play lists

Teaching and Learning Resources

Click on titles

Learning Contents

Financial Markets and Financial Instruments

Tutorials

Readings

Financial analysis (also referred to as financial statement analysis or accounting analysis) refers to an assessment of the viability, stability and profitability of a business, sub-business or project.

It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions.

Continue or discontinue its main operation or part of its business;
Make or purchase certain materials in the manufacture of its product;
Acquire or rent/lease certain machineries and equipment in the production of its goods;
Issue stocks or negotiate for a bank loan to increase its working capital;
Make decisions regarding investing or lending capital;
Other decisions that allow management to make an informed selection on various alternatives in the conduct of its business.

See also

Ratios

External links

[1] SFAF - the French Society of Financial Analysts
[2] ACIIA - Association of Certified International Investment Analysts
[3] EFFAS - European Federation of Financial Analysts Societies
[4] OBKS (Outsourcing Bookkeeping Service)- Financial analysis allow users to focus on their main business activity.

See also

External links

Financial Markets with Yale Professor Robert Shiller

A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument.

According to IAS 32 and 39, it is defined as 'any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity'.

See also

Off-balance-sheet issues

External links

IFRS List - The online community about IFRS/IAS and Auditing

Valuing Financial Assets

Tutorials

Readings

A financial asset is an intangible asset that derives value because of a contractual claim. Examples include bank deposits, bonds, and stocks. Financial assets are usually more liquid than tangible assets, such as land or real estate, and are traded on financial markets.^[1]^[2]^[3]^[4].

References

In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises,
or intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company). Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.

See also

Modern portfolio theory (MPT) is a theory of investment which attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets. Although MPT is widely used in practice in the financial industry and several of its creators won a Nobel memorial prize^[1] for the theory, in recent years the basic assumptions of MPT have been widely challenged by fields such as behavioral economics.

MPT is a mathematical formulation of the concept of diversification in investing, with the aim of selecting a collection of investment assets that has collectively lower risk than any individual asset. That this is possible can be seen intuitively because different types of assets often change in value in opposite ways.^[2] For example, to the extent prices in the stock market move differently from prices in the bond market, a collection of both types of assets can in theory face lower overall risk than either individually. But diversification lowers risk even if assets' returns are not negatively correlated—indeed, even if they are positively correlated.

More technically, MPT models an asset's return as a normally distributed function (or more generally as an elliptically distributed random variable), defines risk as the standard deviation of return, and models a portfolio as a weighted combination of assets, so that the return of a portfolio is the weighted combination of the assets' returns. By combining different assets whose returns are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio return. MPT also assumes that investors are rational and markets are efficient.

MPT was developed in the 1950s through the early 1970s and was considered an important advance in the mathematical modeling of finance. Since then, many theoretical and practical criticisms have been leveled against it. These include the fact that financial returns do not follow a Gaussian distribution or indeed any symmetric distribution, and that correlations between asset classes are not fixed but can vary depending on external events (especially in crises). Further, there is growing evidence that investors are not rational and markets are not efficient.^[3]^[4]

See also

External links

Macro-Investment Analysis, Prof. William F. Sharpe, Stanford

An Introduction to Investment Theory, Prof. William N. Goetzmann, Yale School of Management

Free Stock Portfolio Optimization Online Allows users to compare stock performance, make free stock analysis, and optimize stock portfolio.

Free Web Based Tool For Portfolio Optimization Optimize portfolios with constraints (e.g. no short selling), track portfolio performance and carry out sensitivity analyses. Detailed graphical reporting.

In finance, arbitrage pricing theory (APT) is a general theory of asset pricing that holds that the expected return of a financial asset can be modeled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor-specific beta coefficient. The model-derived rate of return will then be used to price the asset correctly - the asset price should equal the expected end of period price discounted at the rate implied by the model. If the price diverges, arbitrage should bring it back into line.

The theory was initiated by the economist Stephen Ross in 1976.

See also

External links

In finance, an Option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price.^[1] The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the corresponding obligation to fulfill the transaction. The price of an option derives from the difference between the reference price and the value of the underlying asset (commonly a stock, a bond, a currency or a futures contract) plus a premium based on the time remaining until the expiration of the option. Other types of options exist, and options can in principle be created for any type of valuable asset.

An option which conveys the right to buy something at a specific price is called a call; an option which conveys the right to sell something at a specific price is called a put. The reference price at which the underlying asset may be traded is called the strike price or exercise price. The process of activating an option and thereby trading the underlying at the agreed-upon price is referred to as exercising it. Most options have an expiration date. If the option is not exercised by the expiration date, it becomes void and worthless.^[1]

In return for assuming the obligation, called writing the option, the originator of the option collects a payment, the premium, from the buyer. The writer of an option must make good on delivering (or receiving) the underlying asset or its cash equivalent, if the option is exercised.

An option can usually be sold by its original buyer to another party. Many options are created in standardized form and traded on an anonymous options exchange among the general public, while other over-the-counter options are customized ad hoc to the desires of the buyer, usually by an investment bank.^[2]^[3]

See also

External links

Valuing Real Assets

Tutorials

Readings

In finance, valuation is the process of estimating what something is worth. Items that are usually valued are a financial asset or liability. Valuations can be done on assets (for example, investments in marketable securities such as stocks, options, business enterprises, or intangible assets such as patents and trademarks) or on liabilities (e.g., bonds issued by a company). Valuations are needed for many reasons such as investment analysis, capital budgeting, merger and acquisition transactions, financial reporting, taxable events to determine the proper tax liability, and in litigation.

See also

What are Real Assets?

A real asset is a tangible asset like gold, oil, and real estate.
It has intrinsic value due to its utility.
Its value is derived by virtue of what it represents.

Why invest in Real Assets?

Real Assets have low correlations to traditional stocks and bonds

Because commodities have low correlations to stocks and bonds, they can be a good choice to lower your overall portfolio risk while enhancing your potential for better long-term risk-adjusted returns.

Hedge against inflation

Inflation is the increase in the amount of currency required to purchase goods and services. Commodities can help protect investment portfolios against inflation because they represent the value of goods and services, not the value of currency. According to the U.S. Bureau of Labor Statistics, inflation has reduced Americans' purchasing power every year but two dating back to 1945.

The most commonly referenced measure of inflation is the Consumer Price Index (CPI). The CPI is based on a monthly survey by the U.S. Bureau of Labor Statistics and it compares changes in the prices paid by consumers for a representative basket of goods and services. The monthly CPI reading is widely considered a useful way to measure prices over time.

When it comes to investing - whether for income or for growth - you can't afford to ignore the eroding effect inflation can have on the value of your assets.

Read More ...

Market-based real asset valuation

Capital Financial Structure

Tutorials

Readings

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc.

The Modigliani-Miller theorem, proposed by Franco Modigliani and Merton Miller, forms the basis for modern thinking on capital structure, though it is generally viewed as a purely theoretical result since it disregards many important factors in the capital structure decision. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. This result provides the base with which to examine real world reasons why capital structure is relevant, that is, a company's value is affected by the capital structure it employs. Some other reasons include bankruptcy costs, agency costs, taxes, and information asymmetry. This analysis can then be extended to look at whether there is in fact an optimal capital structure: the one which maximizes the value of the firm.

See also

External links

Making capital structure support strategy

CFOs invariably ask themselves two related questions when managing their balance sheets: should they return excess cash to shareholders or invest it and should they finance new projects by adding debt or drawing on equity? Indeed, achieving the right capital structure the composition of debt and equity that a company uses to finance its operations and strategic investments has long vexed academics and practitioners alike.¹ Some focus on the theoretical tax benefit of debt, since interest expenses are often tax deductible. More recently, executives of public companies have wondered if they, like some private equity firms, should use debt to increase their returns. Meanwhile, many companies are holding substantial amounts of cash and deliberating on what to do with it.

The issue is more nuanced than some pundits suggest. In theory, it may be possible to reduce capital structure to a financial calculation to get the most tax benefits by favoring debt, for example, or to boost earnings per share superficially through share buybacks. The result, however, may not be consistent with a company's business strategy, particularly if executives add too much debt.² In the 1990s, for example, many telecommunications companies financed the acquisition of third-generation (3G) licenses entirely with debt, instead of with equity or some combination of debt and equity, and they found their strategic options constrained when the market fell.

Indeed, the potential harm to a company's operations and business strategy from a bad capital structure is greater than the potential benefits from tax and financial leverage. Instead of relying on capital structure to create value on its own, companies should try to make it work hand in hand with their business strategy, by striking a balance between the discipline and tax savings that debt can deliver and the greater flexibility of equity. In the end, most industrial companies can create more value by making their operations more efficient than they can with clever financing.³

Read More ...

Incentives, Information, and Corporate Control

Tutorials

Readings

Managerial economics as defined by Edwin Mansfield is "concerned with application of economic concepts and economic analysis to the problems of formulating rational managerial decision.”^[1] It is sometimes referred to as business economics and is a branch of economics that applies microeconomic analysis to decision methods of businesses or other management units. As such, it bridges economic theory and economics in practice.^[2] It draws heavily from quantitative techniques such as regression analysis and correlation, Lagrangian calculus (linear).^[3] If there is a unifying theme that runs through most of managerial economics it is the attempt to optimize business decisions given the firm's objectives and given constraints imposed by scarcity, for example through the use of operations research, programming, and other computational methods.^[4]^[5]

Managerial decision areas

assessment of investible funds
selecting business area
choice of product
determining optimum output
determining price of product
determining input-combination and technology
sales promotion

Almost any business decision can be analyzed with managerial economics techniques, but it is most commonly applied to:

Risk analysis - various models are used to quantify risk and asymmetric information and to employ them in decision rules to manage risk.

Production analysis - microeconomic techniques are used to analyze production efficiency, optimum factor allocation, costs, economies of scale and to estimate the firm's cost function.

Pricing analysis - microeconomic techniques are used to analyze various pricing decisions including transfer pricing, joint product pricing, price discrimination, price elasticity estimations, and choosing the optimum pricing method.

Capital budgeting - Investment theory is used to examine a firm's capital purchasing decisions.

At universities, the subject is taught primarily to advanced undergraduates and graduate business schools. It is approached as an integration subject. That is, it integrates many concepts from a wide variety of prerequisite courses. In many countries it is possible to read for a degree in Business Economics which often covers managerial economics, financial economics, game theory, business forecasting and industrial economics.

See also

External Links

Managerial Incentives

Risk Management

Tutorials

Readings

Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events^[1] or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures (at any phase in design, development, production, or sustainment life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attack from an adversary, or events of uncertain or unpredictable root-cause. Several risk management standards have been developed including the Project Management Institute, the National Institute of Science and Technology, actuarial societies, and ISO standards.^[2]^[3] Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety.

The strategies to manage risk typically include transferring the risk to another party, avoiding the risk, reducing the negative effect or probability of the risk, or even accepting some or all of the potential or actual consequences of a particular risk.

Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk, whether the confidence in estimates and decisions seem to increase.^[1]

Moving from Qualitative to Quantitive Assessment - Assigning Numeric Scales

See also

External links

Risk management at the Open Directory Project

Recommended Text

Financial Markets & Corporate Strategy
by Mark Grinblatt, Sheridan Titman

Check the availability and buy your books from our Bookshop